Page 35 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Self Assessment

Fill in the blanks:
4. In trend analysis, ……………… are compared over time, typically years.

5. Financial ……………… are only meaningful when compared with other information.
6. Tools employed in the ……………… analysis are Common-size financial statements and
financial ratios.

3.3 Common-size Statements

A company financial statement that displays all items as percentages of a common base figure
is known as common size financial statement. This type of financial statement allows for easy
analysis between companies or between time periods of a company.
The values on the common size statement are expressed as percentages of a statement component
such as revenue. While most firms don’t report their statements in common size, it is beneficial to
compute if you want to analyze two or more companies of differing size against each other.
Formatting financial statements in this way reduces the bias that can occur when analyzing
companies of differing sizes. It also allows for the analysis of a company over various time
periods, revealing,

Example: What percentage of sales is cost of goods sold and how that value has changed
over time.
Common size financial statements put all numbers in context, since the act of producing them
involves calculating a ratio for each number on the statements. Without common sizing the
statements, it is difficult to attach meaning to the numbers or to pick up trends. That is why
common size financial statements are used for financial analysis instead of the actual statements
themselves.
!

Caution For Balance sheet, total volume of assets and liabilities are taken into consideration
for the computation of a share of each financial factor available under the heading of assets
and liabilities.

Example: Prepare the common size statement analysis for the firm ABC Ltd.

Liabilities 2008 (`) 2009 (`) Assets 2008 (`) 2009 (`)
Share capital 2,00,000 3,00,000 Fixed assets 2,25,000 4,00,000
Reserves and surpluses 1,00,000 2,00,000 Stock 1,29,000 2,00,000
Bank overdraft 60,000 2,00,000 Quick assets 46,000 2,00,000
Quick liabilities 40,000 1,00,000
4,00,000 8,00,000 4,00,000 8,00,000
Solution: Common size statement analysis of the Balance sheet of the firm ABC Ltd.
Particulars Amount % of Balance sheet total
Assets
2008 (`) 2009 (`) 2008 (`) 2009 (`)
Fixed assets 2,25,000 4,00,000 56.25 50
Contd…

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