Common Size Balance Sheet

The common size balance sheet is a financial statement analysis technique that expresses each item on the balance sheet as a percentage of total assets. This allows for a more meaningful comparison of the components of the balance sheet over time or between different companies. The common size balance sheet is calculated by dividing each line item on the balance sheet by the total assets and multiplying by 100 to express it as a percentage.

Importance of Common Size Balance Sheet

The common size balance sheet helps in analyzing the composition and structure of a company's assets, liabilities, and equity. It provides insights into the relative importance of different items on the balance sheet and highlights any significant changes over time. This analysis is useful for investors, creditors, and management in making informed decisions.

Calculation of Common Size Balance Sheet

To calculate the common size balance sheet, follow these steps:

1. Obtain the balance sheet of the company.
2. Calculate the total assets by adding up all the asset items.
3. Divide each asset item by the total assets and multiply by 100 to express it as a percentage.
4. Repeat the above step for each liability and equity item.

Example

Let's consider a simplified balance sheet of Company XYZ:

Assets:
- Cash: $50,000
- Accounts Receivable: $30,000
- Inventory: $70,000
- Property, Plant, and Equipment: $150,000

Total Assets: $300,000

Liabilities:
- Accounts Payable: $40,000
- Notes Payable: $60,000

Equity:
- Common Stock: $100,000

To calculate the common size balance sheet, divide each asset, liability, and equity item by the total assets and multiply by 100:

- Cash: ($50,000 / $300,000) * 100 = 16.67%
- Accounts Receivable: ($30,000 / $300,000) * 100 = 10%
- Inventory: ($70,000 / $300,000) * 100 = 23.33%
- Property, Plant, and Equipment: ($150,000 / $300,000) * 100 = 50%

- Accounts Payable: ($40,000 / $300,000) * 100 = 13.33%
- Notes Payable: ($60,000 / $300,000) * 100 = 20%

- Common Stock: ($100,000 / $300,000) * 100 = 33.33%

Benefits of Common Size Balance Sheet Analysis

- Facilitates comparison: By expressing each item as a percentage of total assets, the common size balance sheet allows for easy comparison of different companies or the same company over time.
- Identifies trends: Changes in the composition of the balance sheet can be easily identified using common size analysis. This helps in identifying trends and making informed decisions.
- Highlights financial structure: The analysis reveals the relative importance of different items and their impact on the financial structure of the company. It assists in evaluating the risk and solvency of the company.
- Assists in forecasting: By analyzing historical data, trends, and changes in the common size balance sheet, future projections and forecasts can be made more accurately.

In conclusion, the common size balance sheet is a useful tool for analyzing the structure and

In common size balance sheet the total of assets and liabilities is assumed to be 100 per cent. All the items in the balance sheet are expressed as a percentage of total of assets or liabilities.
formula:- Value of Asset or liability÷ total Value of asset or liability ×100