Common Size Analysis Part 4

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In this analysis the size of the entire business activities considered as 100. This analysis can be done for both balance sheet and income statement

  • Common size Balance sheet – in this analysis we consider total assets as 100% and total liabilities as 100%. And we will give weightage to different assets and liabilities.

  • Common size Income statement – in this analysis sales and total expenses will be considered as 100% and we calculate different items and their weightage.

Example: Following are the income statements of a company for the year ending 31st December 2006 and 2007

Table of Following Are the Income Statements of a Company for the Year Ending 31st December 2006 and 2007
Title: Table of Following are the income statements of a company for the year ending 31st December 2006 and 2007

2006

2007

Amount

Amount (Rs.)

Sales

Miscellaneous income

Expenses:

Cost of sales

Office Expenses

Interest

Selling expenses

Net Profit

500000

20000

700000

15000

520000

715000

330000

20000

25000

30000

510000

30000

30000

40000

405000

610000

115000

105000

520000

750000

Solution:

Table of Solution 2006 and 2007
Title: Table of Solution 2006 and 2007

2006

2007

Amount

Percentage

Amount (Rs.)

Percentage

Sales

Less Cost of goods sold

Gross Profit

Operating Expenses:

Office Expenses

Selling expenses

Total Operating Expenses

Operating profit

Miscellaneous income

Total income

Less: Non-operating Expenses

Net profit

500000

330000

170000

20000

30000

50000

120000

20000

140000

25000

115000

100

66

34

4

6

10

24

4

28

5

23

700000

510000

190000

30000

40000

70000

120000

15000

135000

30000

105000

100

72.86

27.14

4.29

5.71

10

17.14

2.14

19.28

4.28

15.00

Interpretation:

– The sale and gross profit have increased in absolute figures in 2007 as compared to 2006. But the percentage of gross profit to sales has gone down in 2007.

– The increase in cost of sales as a percentage of sales has brought the profitability from 34% to 27.14%.

– Operating expenses have remained the same in both the years.

– Net profit have decreased both in absolute figures and as a percentage

in 2007 as compared to 2006.

Trend Percentage Analysis:

In this analysis we study several financial statements over a series of years. First year is taken as base year and considered as 100% and the next years’ growth/decline is calculated basing on first year.

Example:

Image Of Trend Percentage Analysis

Image of Trend Percentage Analysis

Image Of Trend Percentage Analysis

Solution:

Image of trend Percentages

Image of Trend Percentages

Image of trend Percentages

Interpretation:

  • On the whole, 2005 was a bad year but the recovery was made during 2006. In this year there is increase in sales as well as profit.

  • The figure of 2005 when compared with 2004 reveal that the sales have come down by 5%. However, the cost of goods sold and the expenses have decreased only by 1.8% and 3% respectively. This has resulted in decrease in Net profit by 12%.

  • The position was recovered in 2006 and not only the decline but also there is positive growth in both 2006 and 2007. Moreover, the increase in profit by 31.3% (2006) and 50.6% (2007) is much more than the increased in sales by 20% and 30% respectively. This shows major portion of cost of goods sold and expenses is of fixed nature.

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