What is Common Size Statement? How to prepare it?

Common Size Statement: In this statement each figures are converted into percentage with the help of common base. It helps to analyse the figures are increases or decreases with respect to common base.

Importance:

·         It shows how each number is related to common base.

·         With the help of it investors or company can easily understand the figures.

·         It shows how the trend in the market is changes.

·         With the help of income statement company can find out the percentage increase or decrease with respect of net sales in comparison to previous year.

Example: Prepare common size balance sheet of company X with the help of following information:

                                         Balance sheet  as on 31^st December 2006

Liabilities	2005	2006	Assets	2005	2006
Shares	3,00,000	4,00,000	Goodwill	3,00,000	3,50,000
7% Debenture	4,00,000	2,00,000	Livestock	4,00,000	2,20,000
Reserve	50,000	80,000	Building	90,000	1,70,000
Profit & Loss a/c	48,000	40,000	Debtors	40,000	48,000
Creditors	40,000	60,000	Stock	15,000	10,000
Bills payable	12,000	25,000	Cash	5,000	7,000
	8,50,000	8,05,000		8,50,000	8,05,000

Solution:

Particulars	2005	2006	Percentage of 2005	Percentage of 2006
Assets:
Goodwill	3,00,000	3,50,000	35.29	43.48
Livestock	4,00,000	2,20,000	47.06	27.33
Building	90,000	1,70,000	10.59	21.12
Debtors	40,000	48,000	4.71	5.96
Stock	15,000	10,000	1.76	1.24
Cash	5,000	7,000	0.59	0.87
Total	8,50,000	8,05,000	100	100
Liabilities:
Shares	3,00,000	4,00,000	35.29	49.69
7% Debenture	4,00,000	2,00,000	47.06	24.84
Reserve	50,000	80,000	5.88	9.94
Profit & Loss a/c	48,000	40,000	5.66	4.97
Creditors	40,000	60,000	4.71	7.45
Bills payable	12,000	25,000	1.41	3.11
Total	8,50,000	8,05,000	100	100

Analysis:

·         In 2005 47% in total asset is contributed by livestock which is decreases in 2006 i.e. 27% and the contribution of cash asset is very low but in 2006 it increases from 0.59% to 0.87%.

·         In 2006 the contribution of goodwill in total assets is increases from 35% to 43% and fixed assets contributed highest part in total assets in comparison to current assets in both the year.

Example: Prepare common size income statement of company X from the following information:

                               Trading & Profit & Loss a/c for the year ended 2008

Particulars	2007	2008	Particulars	2007	2008
To opening stock	4000	2000	By closing stock	3000	7000
To wages	6000	5000	By sales	60,000	50,000
To other direct expense	3000	8000
To carriage inward	700	600
To gross profit (balancing figure)	49,300	41,400
	63,000	57,000		63,000	57,000
To office expenses	1,000	2,000	By gross profit	49,300	41,400
To salary	6,000	5,000	By rent received	3,200	3,500
To preliminary expenses write off	1,200	2,000	By commission	2,600	2,500
To depreciation	12,000	10,000	By dividend received	6,000	8,000
To selling & distribution	10,000	9,600	By profit on sale of asset	----	3,000
To discount on issue of share	500	2,000
To interest paid	2,000	1,000
To provision for tax	10,000	12,000
To proposed dividend	5,500	4,500
To net profit (balancing figure)	12,900	10,300
	61,100	58,400		61,100	58,400

Solution:

Particulars	2007	2008	Percentage of 2007	Percentage of 2008
Net sales	60,000	50,000	100	100
Less: Cost of goods sold	10,700	8,600	17.83	17.2
Gross profit (A)	49,300	41,400	82.17	82.8
Less: operating expenses:
Salary	6,000	5,000	10	10
Office expenses	1,000	2,000	1.67	4
Depreciation	12,000	10,000	20	20
Selling & distribution	10,000	9,600	16.67	19.2
Interest	2,000	1,000	3.33	2
Proposed dividend	5,500	4,500	9.17	9
Provision for tax	10,000	12,000	16.67	24
Total (B)	46,500	44,100	77.5	88.2
Operating income (A-B)	2,800	(2,700)	4.67	(5.4)
Add: Non- operating income:
Commission received	2,600	2,500	4.33	5
Dividend received	6,000	8,000	10	16
Rent received	3,200	3,500	5.33	7
Profit on sale of asset	-----	3,000	-----	6
Total	11,800	17,000	19.66	34
Less: Non-operating expenses:
Preliminary expenses write off	1,200	2,000	2	4
Discount on issue of share	5,00	2,000	0.83	4
Net profit	12,900	10,300	21.5	20.6

Cost of goods sold = opening stock + other direct expenses+wages + carriage inward – closing stock

Analysis:

·         Current year gross profit decreases from 82.17 to 82.8 in comparison to previous year

·         By taking net sales as base the net profit is decrases from 21.5 to 20.6.

·         An operating income become negative by considering sales as base number and the operating expenses increases from 19.66% to 34%.

      So, It shows that due to decrease in sales the gross profit and operating income also decreases.