{"id":872,"date":"2015-05-13T18:44:32","date_gmt":"2015-05-13T18:44:32","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=872"},"modified":"2015-06-09T13:02:05","modified_gmt":"2015-06-09T13:02:05","slug":"common-size-financial-statements","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/common-size-financial-statements\/","title":{"raw":"Common-Size Financial Statements","rendered":"Common-Size Financial Statements"},"content":{"raw":"

Analysts also use vertical analysis of a single financial statement, such as an income statement. Vertical analysis<\/span><\/strong> consists of the study of a single financial statement in which each item is expressed as a percentage of a significant total. Vertical analysis is especially helpful in analyzing income statement data such as the percentage of cost of goods sold to sales.\u00a0 Where horizontal analysis looked at one account at a time, vertical analysis will look at one YEAR at a time.<\/p>\r\n

Financial statements that show only percentages and no absolute dollar amounts are common-size statements<\/span><\/strong>. All percentage figures in a common-size balance sheet are percentages of total assets<\/strong> while all the items in a common-size income statement are percentages of net sales<\/strong>. The use of common-size statements facilitates vertical analysis of a company\u2019s financial statements.<\/p>\r\nhttps:\/\/youtu.be\/OT1BVZPNfks\r\n

The calculation for common-size percentages is:\u00a0(Amount \/ Base amount) and multiply by 100 to get a percentage.\u00a0 Remember, on the balance sheet the base is total assets and on the income statement the base is net sales.\u00a0 The video showed an example using the balance sheet so we will look at Synotech, Inc.'s income statement with common-size percentages (calculations provided in last column).<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Synotech, Inc.<\/strong>\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Income Statement<\/strong>\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
For year ended December 31<\/strong><\/td>\r\n<\/td>\r\n<\/tr>\r\n
Net Sales<\/td>\r\n$10,498.8<\/td>\r\n100.0%<\/td>\r\n( 10,498.8<\/span><\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Cost of goods sold<\/td>\r\n5,341.3<\/td>\r\n50.9%<\/td>\r\n( 5,341.3<\/span><\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
\u00a0 Gross profit<\/td>\r\n5,157.5<\/td>\r\n49.1%<\/td>\r\n( 5,157.5<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Selling, general and admin expenses<\/td>\r\n3,662.5<\/td>\r\n34.9%<\/td>\r\n( 3,662.5<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Other expense, net<\/td>\r\n112.6<\/td>\r\n1.1%<\/td>\r\n(\u00a0 112.6<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Interest expense<\/td>\r\n236.9<\/td>\r\n2.3%<\/td>\r\n(\u00a0 236.9<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Income before taxes<\/td>\r\n1145.5<\/td>\r\n10.9%<\/td>\r\n( 1,145.5<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Income tax expense<\/td>\r\n383.5<\/td>\r\n3.7%<\/td>\r\n(\u00a0 383.5<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n
Net Income<\/td>\r\n762<\/td>\r\n7.3%<\/td>\r\n(\u00a0 762<\/span><\/td>\r\n<\/tr>\r\n
10,498.8 )<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhat does this common-size percentage tell you about the company?\u00a0 Since we use net sales as the base on the income statement, it tells us how every dollar of net sales is spent by the company.\u00a0 For Synotech, Inc.,\u00a0approximately 51 cents of every sales dollar is used by cost of goods sold and 49 cents of every sales dollar is left in gross profit to cover remaining expenses.\u00a0 Of the 49 cents remaining, almost 35 cents is used by operating expenses (selling, general and administrative), 1 cent by other and 2 cents in interest.\u00a0 We earn almost 11 cents of net income before taxes and over 7 cents in net income after taxes on every sales dollar.\u00a0 This is a little easier to understand than the larger numbers showing Synotech earned $762 million dollars.\r\n\r\nThe same process would apply on the balance sheet but the base is total assets.\u00a0 The common-size percentages on the balance sheet explain how our assets are allocated OR how much of every dollar in assets we owe to others (liabilities) and to owners (equity).\u00a0 Many computerized accounting systems automatically calculate common-size percentages on financial statements.","rendered":"

Analysts also use vertical analysis of a single financial statement, such as an income statement. Vertical analysis<\/span><\/strong> consists of the study of a single financial statement in which each item is expressed as a percentage of a significant total. Vertical analysis is especially helpful in analyzing income statement data such as the percentage of cost of goods sold to sales.\u00a0 Where horizontal analysis looked at one account at a time, vertical analysis will look at one YEAR at a time.<\/p>\n

Financial statements that show only percentages and no absolute dollar amounts are common-size statements<\/span><\/strong>. All percentage figures in a common-size balance sheet are percentages of total assets<\/strong> while all the items in a common-size income statement are percentages of net sales<\/strong>. The use of common-size statements facilitates vertical analysis of a company\u2019s financial statements.<\/p>\n