Explain how common size statements are prepared giving an example.

The two Common Size Statements that are most commonly prepared are as follows.

1. Common Size Balance Sheet

2. Common Size Income Statements

 

Common Size Statement is prepared in a columnar form for analysis. In a Common Size Statement each item of the financial statements is compared to a common item. The analyses based on these statements are commonly known as Vertical Analysis.

 

The following are the columns prepared in a Common Size Statement.

1. Particulars Column: This column shows the various financial items under their respective heads.

2. Amount Columns: These columns depict the amount of each item, sub-totals and the gross total of a particular year.

3. Percentage or Ratio Columns: These columns show the proportion of each item to the common item either in terms of percentage or ratio.

 

The Common Size Statements can be presented in the following two ways.

 

Method 1

 

1. Percentage Column is shown beside the Amount Column of the year to which percentage column belongs.

 

Particulars	Year (2007) Rs	%	Year (2006) Rs	%

 

Method 2

 

Amount Columns are shown first and their percentage columns are shown  after the Amount Columns.

 

Particulars	Year (2007) Rs	Year (2008) Rs	% 2007	% 2008

 

The preparation of the Common Size Statements can be better understood by the help of the following example.

 

Balance Sheet of Indo Press Ltd.
Liabilities	2007 Rs	2008 Rs	Assets	2007 Rs	2008 Rs
Capital Reserves and Surplus Long term Loans Current Liabilities	1,00,000 80,000 2,00,000 1,20,000	1,50,000 1,20,000 1,50,000 1,80,000	Fixed Assets Investments Current Asset	2,00,000 1,20,000 1,80,00	2,40,000 1,50,000 2,10,000
	5,00,000	6,00,000		5,00,000	6,00,000

 

Indo Press Ltd. Comparative Size Balance Sheet for the year 2007 and 2008
Particulars	2007 Rs	2008 Rs	% 2007	% 2008
Assets: Fixed Assets Investments Current Assets	2,00,000 1,20,000 1,80,000	2,40,000 1,50,000 2,10,000	40 24 36	40 25 35
	5,00,000	6,00,000	100	100
Liabilities: Capital Reserved Surplus Long terms loans Current liabilities	1,00,000 80,000 2,00,000 1,20,000	1,50,000 1,20,000 1,50,000 1,80,000	20 16 40 24	25 20 25 30
	5,00,000	6,00,000	100	100

 

Preparation

 

Step 1: Title of the Common Size Statement, i.e. ‘Common Size Balance Sheet’ is written on the top of the statement.

Step 2: In the ‘Particulars’ column, the various items of the Balance Sheet are shown under the headings of ‘Assets’ and ‘Liabilities’.

Step 3: In the ‘Amount’ column, amount of the items are shown in the ‘Year’ column to which they belong

Step 4: The Assets and Liabilities are totaled and are shown separately for each year.

Step 5: In the ‘Percentage’ column, the percentage of each item in comparison to the Total of Balance Sheet are shown, i.e. for year 2007, the common base is Rs 5,00,000 and for the year 2008, the common base is Rs 6,00,000. The percentage change in each item is calculated by the help of the following formula.