Common Size Financial Statements
One way to visually zero in on potential problems and missteps taking place within a business is to prepare and study common size financial statements. Common size financial statements get rid of the dollars and cents, reflecting account balances as percentages.
For example, with the vertical analysis of income statement items, all income statement items are shown as a dollar amount and percentage of total sales. With a common size income statement, you omit any references to the dollar figures.
The big deal about common size financial statements is that the distraction of the dollar amounts is taken away. Cleaning up the statements this way allows the user to compare different companies in the same industry in a more equitable manner.
For example, just because one company has higher total revenue than another doesn’t necessarily make it a better company to invest in or loan money to. Showing accounts as a percentage of another account of interest rather than a dollar amount really allows you to see the big picture of how the business is doing rather than obsessing about the difference in dollar amounts.