Common size statements refer to those statements in which the individual figures are to be converted into percentages up to some common base. Common size statement can be prepared for statement of profit and loss and for the balance sheet as well. Assignment help
Thus their preparation is an important process and students may sometimes require assignment
or specifically accounting Assignment help for the same.
Purpose of Common Size Statement:-
- To show how various elements have changed in relation to revenue from operations, total assets, and total liabilities:
Comparative financial statements have one major drawback that it does not present the various items in relation to total assets or total equity,
revenue from operations and liabilities. The preparation of common size statements helps to remove this drawback.
- To establish a relationship:
After a period of time, a relationship is established between various items of balance sheet to total assets
or total liabilities and various items of statement of profit and loss to revenue from operations. By studying the change in such a relationship, significant conclusions can be draw.
- To provide for a common base for comparison:
A common base for comparison is provided by common size statements. The different firm’s financial statements can be convert into uniform common-size format ignoring the size of individual items. Therefore, the comparison of financial position and profitability of two or more businesses over a period of time can be facilitate.
Limitations of Common Size Statement:-
- Adjustments need to be make as different accounting principals may be use different firms.
- Different accounting calendars may be use the firms.
- Comparison becomes difficult when it comes to diversified companies.
- The adjustment for financial data is not do for price changes of inflation/deflation.
- Other sources of data should also be analyze as judgment cannot only be based on this analysis.
Advantages of Common Size Statements:-
- As the size does not matter that is, cross-sectional analysis, so the comparison between the companies becomes easy.
- The time series can also be analyze with the help of this.
- The difference in corporate strategies is also highlight.
- Removal of those financial differences between companies that have nothing to do with their primary operations,
- is the purpose of the common size financial statements.
Disadvantages of Common Size Statements:-
- If consistency is not maintaine in concepts, accounting policies and conventions, common size becomes useless. Assignment help
- A common size does not recognize changes in price level as it is based on historical data.
- The common size statement does not address the issue of window dressing yet it is very common in the financial statement.
- The qualitative elements of the firm are not give importance the common size statement.
A typical size balance sheet is a statement in which the sum of assets, equity,
and liabilities is equal to 100 and all numbers display the same amount percentage of the total.
Purpose of Common Size Balance Sheet:-
- Changes in individual items of balance sheet can be analyze.
- The trends in various items of assets and liabilities can be establish.
- The relative financial soundness for different enterprises belonging to the same industry can be judge preparing
- their common size balance sheets for different periods.
- The financial strategy adopted different enterprises belonging to the same industry can be assesse.
Format of Common Size Balance Sheet:-
- The items of balance sheet will be include in the first column.
- Second column will consist of the amount of different item of assets and equity and liability of balance sheet of current year.
- The amounts of different items of assets and equity and liabilities
- of previous year will be include in the third column.
- Fourth column consists of the percentage of different items of assets and equity and liability of current
- year to current year’s total liabilities/assets which are consider to be 100.
- Fifth column will have percentage of different items of assets and liabilities of previous year to previous year’s total liabilities/assets,
- which are to be take as 100.
A common size statement of profit and loss refers to a statement in which the figure of revenue from operation is take to be equal to 100 rest
all the other figures are to be express as percentage of revenue from operations.
Purpose of Common Size Statement of Profit and Loss:-
- The relationship between revenue from operation and individual items of profit and loss can be establish.
- The changes in individual items of statement of statement of profit and loss in relationship to revenue from operation, can be analyze.
- The relative efficiency of the cost items of the two or more firms belonging to the same industry, can be judge.
Format of Common Size Statement of Profit and Loss:-
- The items of Statement of Profit and Loss will be include in the first column.
- Second column will consist of the amount of different items that is, income or expenses, of Statement of Profit and Loss for the current year.
- The amounts of different items that is, income/expenses of statement of profit for the previous year will be include in the third column.
- Fourth column consists of the percentage of different items of statement of profit and loss for the
- current year to current year’s Revenue from Operations which are considere to be 100.
- Fifth column will have percentage of different items of statement of profit and loss for the previous year to
- previous year’s Revenue from Operations, which are to be take as 100.
Hence, common size statements provide us help to analyze the company. It checks the position of the company
where it stands based on the performance of the shareholders and
its profit-oriented area. These points can be referr for accounting help. In fact a detail study must be further do to augment the assignment help offer.