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Common Size Financial Statement(Vertical) Analysis

Common Size Financial Statement Analysis Assignment / Homework Help
Common Size Statement involves representing the income statement figures as a percentage of sales and representing the balance sheet figures as a percentage of total assets. Financial statements represent absolute figures and a comparison of absolute figures can be misleading. For example, the cost of goods sold might have increased but as a percentage of sales it might have decreased. So, to have a perfect understanding about these increases and decreases, the figures reported are converted into percentages to some common base. In Income Statement, Sales figure is assumed to be 100% and all other figures are expressed as a percentage of sales. In Balance Sheet, the total of assets is taken as 100% and all other figures are expressed as a percentage of total assets. This type of Statement so prepared is called as the Common Size Statement and the analysis performed on the Common Size Statement is called as the Common Size Financial Statement Analysis or otherwise called as Vertical Analysis.

Example:

Common Size Income Statements for the years ended 31st Dec 2008 & 31st Dec 2009

2008 2009
Sales 100.00% 100.00%
Less: Cost of goods sold 71.43% 71.11%
Gross profit 28.57% 28.89%
Less: Operating expenses
General & administrative expenses 2.86% 3.33%
Selling & distribution expenses 5.71% 5.56%
Other operating expenses 1.43% 1.67%
Operating profit 18.57% 18.33%
Less: Interest expenses 4.29% 4.44%
Net income before taxes 14.29% 13.89%
Less: Taxes at 30% 4.29% 4.17%
Net Income after taxes 10.00% 9.72%


Common Size Balance Sheets as on 31st Dec 2008 & 31st Dec 2009

2008 2009
Current Assets:
Cash 6.25% 5.17%
Accounts Receivables 25.00% 25.86%
Inventory 18.75% 21.55%
Total Current Assets 50.00% 52.59%
Fixed Assets:
Buildings 37.50% 34.48%
Furnitures & office equipments 12.50% 12.93%
Total Fixed Assets 50.00% 47.41%
Total Assets 100.00% 100.00%
Liabilities:
Current Liabilities:
Accounts Payable 12.50% 10.34%
Notes Payable 6.25% 4.31%
Interest Payable 1.25% 1.03%
Total Current Liabilities 20.00% 15.69%
Shareholder's Equity:
Common Stock 62.50% 64.66%
Retained earnings 17.50% 19.66%
Total Stockholder's equity 80.00% 84.31%
Total Liabilities & Stockholder's equity 100.00% 100.00%


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