What is comparative and common size balance sheet?

A common size balance sheet displays the numeric and relative values of all presented asset, liability, and equity line items. This format is useful for comparing the proportions of assets, liabilities, and equity between different companies, particularly as part of an industry analysis or an acquisition analysis. It is extremely useful to construct a common size balance sheet that itemizes the results as of the end of multiple time periods, in order to construct trend lines to ascertain changes over longer time periods. 

For example, if you were comparing the common size balance sheet of your company to that of a potential acquiree, and the acquiree had 40% of its assets invested in accounts receivable versus 20% for your company, that may indicate that aggressive collection activities could reduce the acquiree's receivables if your company were to acquire it (subject to the existence of any special problems with the customers of the acquiree).

Another possible use of this format is within a benchmarking study. A company could benchmark its financial position against that of a best-in-class company by using common size balance sheets to compare the relative amounts of their assets, liabilities, and equity. Any significant differences would trigger a detailed review of the reasons for the differences, which may lead to the implementation of best practices to bring the financial position of the company into alignment with that of the best-in-class company.

The common size balance sheet is not required under GAAP or IFRS. However, being a useful document for analysis purposes, it is commonly distributed within a company for review by management, and may be found as a standard report template in many commercially-available accounting software packages.

How to Format a Common Size Balance Sheet

There is no mandatory format for a common size balance sheet, though percentages are nearly always placed to the right of the normal numerical results. If you are reporting balance sheet results as of the end of many periods, you may even dispense with numerical results entirely, in favor of just presenting the common size percentages.

Example of a Common Size Balance Sheet

Here is an example of a common size balance sheet that contains the balance sheet as of the end of a company's fiscal year for each of the past two years, with common size percentages to the right:

Both the Comparative and the Common-Size financial statements give a more or less view of the financial statement of the company. Common-size financial statements present all the financial items under their head in percentage terms. While the Comparative financial statements present the financial data for numerous years side by side. This data is to be presented in the form of absolute values, percentages, or both.

The striking difference between the comparative and the common size financial statements is that comparative financial statements present the financial information for several years side by side in the form of absolute values or percentages or both. Whereas the common size financial statements present all these items in percentage terms more often.

The Comparative financial statements are the set of complete financial statements an entity issues, by revealing its information for more than one reporting period. The financial statements which are included in this statement are:

• The Income Statement shows the results for multiple periods.

• The balance sheet shows the financial position of the entity.

• The cash flow statement is defined as more than one period.

Variation of comparative concept also exists which is to report the information for each of the 12 previous months. The comparative financial statements are quite useful for the following reasons:

• This provides a comparison of an entity's financial performance over multiple periods, which will help to determine the trends of the business. 

• The statements also reveal unusual spikes in the information which will help to indicate the presence of accounting errors. 

• This statement also enables a comparison of the expenses and revenues. This will help in the process of Cost Management. 

• The statements predict future performance.

Are Comparative Financial Statements Required?

A comparative statement is a type of document that is used to compare a particular financial statement with the period statements. The Previous financials are presented alongside the latest figures in side-by-side columns, this enables the investors to identify the trends, the track on which a company’s progress is determined and the same can be compared with industry rivals.

Comparative statements are used to figure out finances which is a good practice for the business owner. 

The common size income statement is another type of income statement in which basically each line item is expressed as a percentage of the value of revenue or the sales. Common size financial statements analyze and then compare a company's performance over several periods with varying sales figures.

Analysts analyses this common size as an income statement whereby dividing each line item (for example, gross profit, operating income, and sales and marketing expenses) by the top line (sales). Then this item is then expressed as a percentage of sales.

Example of a Common Size Income Statement

The standard figure that is used in the analysis of a common size income statement is the total sales revenue. The common size percentages are then calculated to show each line item as a percentage of the standard figure or the revenue.

This is quite important to note that the common size calculation is the same as calculating the margins for a company. The net profit margin is the net income that is divided by the sales revenue, and this is typically the common-size analysis. This is the same for calculating the gross margin (sales revenue minus the cost of goods sold, divided by sales revenue), and the operating margin (that is the gross profit minus the selling & general administrative expenses, divided by the sales revenue).

Difference Comparative Financial Statement and Common Size Financial Statement 

The main differences between the comparative analysis and the common size analysis are chalked as follows −

Comparative Analysis

• This analysis shows the previous year’s financial results which occur side by side along with the changes in the amount or its percentage.

  What is comparative and common size statements?

  Comparative statements are used for comparing financial performance for internal purposes and for inter-firm comparison. Common size statements are prepared for the reference of stakeholders.

  What is common size analysis on a balance sheet?

  Common size analysis displays each line item of your financial statement as a percentage of a base figure to help you determine how your company is performing year over year, and compared to competitors. It also shows the impact of each line item on the overall revenue, cash flow or asset figures for your company.

  What is comparative size?

  Comparative Measurement often uses at least one common dimension. For a figure, this tends to be the size of the head. In the example above, the figure is three heads tall. The common dimension aspect is why Comparative Measurement is also known as Proportional Measurement.