# 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

 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:

 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:

Solution:

### 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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