Common–Size Balance Sheet

One technique in financial statement analysis is known as vertical analysis. Vertical analysis results in common-size financial statements. A common-size balance sheet is a balance sheet where every dollar amount has been restated to be a percentage of total assets. We will illustrate this by taking Example Company's balance sheet (shown above) and divide each item by the total asset amount $770,000. The result is the following common-size balance sheet for Example Company:

Example Company Common-Size Balance Sheet December 31, 2011 ASSETS LIABILITIES Current assets Current liabilities Cash 0.3% Notes payable 0.6% Petty cash 0.0% Accounts payable 4.7% Temporary investments 1.3% Wages payable 1.1% Accounts receivable - net 5.3% Interest payable 0.4% Inventory 4.0% Taxes payable 0.8% Supplies 0.5% Warranty liability 0.1% Prepaid insurance     0.2% Unearned revenues     0.2% Total current assets   11.6% Total current liabilities     7.9% - Investments     4.7% Long-term liabilities Notes payable 2.6% Property, plant & equipment Bonds payable   52.0% Land 0.7% Total long-term liabilities   54.6% Land improvements  0.8% Buildings 23.4% Equipment 26.1% Total liabilities   62.5% Less: Accum depreciation   (7.3%) Prop, plant & equip - net   43.7% - Intangible assets STOCKHOLDERS' EQUITY Goodwill 13.6% Common stock 14.3% Trade names   26.0% Retained earnings 29.7% Total intangible assets   39.6% Less: Treasury stock   (6.5%) Total stockholders' equity   37.5% Other assets     0.4% - Total assets 100.0% Total liab. & stockholders' equity 100.0%

The benefit of a common-size balance sheet is that an item can be compared to a similar item of another company regardless of the size of the companies. A company can also compare its percentages to the industry's average percentages. For example, a company with Inventory at 4.0% of total assets can look to its industry statistics to see if its percentage is reasonable. (Industry percentages might be available from an industry association, library reference desks, and from bankers. Many banks have memberships in Risk Management Association (RMA), an organization that collects and distributes statistics by industry.) A common-size balance sheet also allows two businesspersons to compare the magnitude of a balance sheet item without either one revealing the actual dollar amounts.