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What is a ‘Common Size Balance Sheet’
A common size balance sheet is a balance sheet that displays both the numeric value and relative percentage for total assets, total liabilities and equity accounts. Common size balance sheets are used by internal and external analysts and are not a reporting requirement of generally accepted accounting principles (GAAP).
BREAKING DOWN ‘Common Size Balance Sheet’
A common size balance sheet allows for the relative level of each asset, liability and equity account to be quickly analyzed. Any single asset line item is compared to the value of total assets. Likewise, any single liability is compared to the value of total liabilities and any equity account is compared to the value of total equity. For this reason, each major classification of account will equal 100%, as all smaller components will add up to the major account classification.
Example of Common Size Balance Sheet
A company has $8 million in total assets, $5 million in total liabilities and $3 million in total equity. The company also has $1 million in cash. The common size balance sheet reports the total assets first in order of liquidity. Liquidity refers to how quickly an asset can be turned into cash without affecting its value. For this reason, the top line of the financial statement would list the cash account with a value of $1 million. In addition, the cash represents $1 million of the total $8 million in total assets. Therefore, along with reporting the dollar amount of cash, the common size financial statement includes a column which reports that cash represents 12.5% ($1 million divided by $8 million) of total assets.
Common size balance sheets are not required under generally accepted accounting principles, nor is the percentage information presented in these financial statements required by any regulatory agency. Although the information presented is useful to financial institutions and other lenders, a common size balance sheet is typically not required during the application for a loan.
Usefulness of Common Size Balance Sheet
Although common size balance sheets are most typically utilized by internal management, they provide useful information to external parties including independent auditors. The most valuable aspect of a common size balance sheet is that it supports ease of comparability. The common size balance sheet shows the make up of a business’s various assets and liabilities through the presentation of percentages, in addition to absolute dollar values. This affords the ability to quickly compare the historical trend of various line items or categories, and provides a baseline for comparison of two firms of different market capitalizations. Additionally, the relative percentages may be compared across companies and industries.