Fundamentals of Management Accounting · Ch 2 — Analysis of Financial Statement
Common-Size Statements
Common-Size Statements
A common-size statement expresses every item of a financial statement as a percentage of a common base, so that the internal composition of the statement stands out and firms of very different sizes can be compared on an equal footing. The base is fixed at 100:
- In a common-size income statement, the base is revenue from operations (net sales) = 100, and every other item — cost of materials consumed, expenses, profit — is shown as a percentage of that revenue.
- In a common-size balance sheet, the base is the total of assets = 100 (equivalently, the total of equity and liabilities = 100), and every asset, liability and capital item is shown as a percentage of that total.
The formula for each line is simply:
Percentage = (Item ÷ Base) × 100, where the base is net revenue from operations (income statement) or total assets (balance sheet).
Because every figure is turned into a percentage of a common base, a small firm and a large firm can be compared directly — absolute size drops out and only the proportions remain. This is the great advantage of the common-size statement over the comparative statement, which still deals in absolute rupees.
Worked Example 2 — Common-Size Statement of Profit and Loss
From the following, prepare a common-size statement of profit and loss for the two years.
| Particulars | 2022-23 (₹) | 2023-24 (₹) |
|---|---|---|
| Revenue from operations | 8,00,000 | 10,00,000 |
| Cost of materials consumed | 4,80,000 | 5,50,000 |
| Other (operating) expenses | 1,60,000 | 2,00,000 |
Solution. Each item is expressed as a percentage of that year's revenue from operations (= 100).
| Particulars | 2022-23 (₹) | % of revenue | 2023-24 (₹) | % of revenue |
|---|---|---|---|---|
| Revenue from operations | 8,00,000 | 100.00 | 10,00,000 | 100.00 |
| Less: Cost of materials consumed | 4,80,000 | 60.00 | 5,50,000 | 55.00 |
| Less: Other (operating) expenses | 1,60,000 | 20.00 | 2,00,000 | 20.00 |
| Total expenses | 6,40,000 | 80.00 | 7,50,000 | 75.00 |
| Profit before tax | 1,60,000 | 20.00 | 2,50,000 | 25.00 |
Sample computations: Cost of materials consumed 2022-23 = 4,80,000 ÷ 8,00,000 × 100 = 60%; in 2023-24 = 5,50,000 ÷ 10,00,000 × 100 = 55%. Total expenses 2023-24 = 7,50,000 ÷ 10,00,000 × 100 = 75%. Profit before tax 2023-24 = 2,50,000 ÷ 10,00,000 × 100 = 25%. …
A statement in which every item is expressed as a percentage of a common base (net revenue from operations for the income statement, total assets for the balance sheet), so that the internal composition can be studied …
The figure taken as 100 in a common-size statement — revenue from operations for the income statement, and total assets (or total of equity and liabilit …