A common size balance sheet is a financial statement that expresses the dollar amounts of each item as a percentage. A balance sheet lists all of a company’s assets, liabilities and equities, and verifies that the assets are equal to the liabilities plus the owner’s equity. A common size balance sheet is used by investors and stakeholders when analyzing all aspects of a company’s performance.
Percentages as Ratios
A balance sheet lists each asset a company owns, along with the value of the asset. It also lists all liabilities, which is money that the company owes to investors or creditors. The owner’s equity is the final component which represents the amount of money the owners of the business are entitled to. To complete a common size balance sheet, each of these three sections must be expressed as a percentage of the whole. These percentages represent ratios, which stakeholders can use to quickly and visibly compare the company's performance over a period of time. A common size balance sheet may contain one year of information or two or more years of financial information.
The first set of ratios is found in the asset section of the statement, which is always the first section. Each asset listed is divided by the total amount of assets and the percentage is listed instead of the actual dollar amount. For example, if a company has $1,500 of assets and of that an asset called Supplies has a balance of $500, the statement would show Supplies with a percentage of 33%. Ratios in the asset section are the current assets to total assets ratio, and long-term assets to total assets ratio.
The liabilities section of a common size balance sheet is calculated by dividing each liability by the total amount of liabilities. Key ratios include the current liabilities to total liabilities ratio. This information gives investors a sense of what sort of financial obligations the company has, which helps put other rations in perspective.
The equity accounts listed on a common size balance sheet are converted into percentages by dividing each equity account by the total amount of equity. Equity is normally divided into the amounts each owner has rights to and the amounts the stockholders own. One of the most important ratios listed on this statement is the stockholder equity to total equity ratio. This ratio illustrates how much of the equity in the company is owned by the stockholders.