How are common-size financial statements created?

Common-size financial statements are created by expressing all items on the income statement as a percentage of total revenue and all items on the balance sheet as a percentage of total assets. This approach allows for meaningful comparisons across different companies or time periods, as it standardizes the figures, enabling analysts, investors, and management to assess the relative size of various line items in relation to a base figure (total revenue or total assets).

The process of taking each line item and dividing it by the relevant total provides insights into the composition of financial statements. For example, on the income statement, common-size analysis helps to understand what percentage of sales is attributed to costs, expenses, and profits, while the balance sheet common-size analysis reveals how much of a company's assets are financed by liabilities versus equity.

This methodology is especially useful for comparing companies of different sizes or for analyzing trends within a company over time. Standardizing figures in this way facilitates comparison by eliminating discrepancies arising from absolute value differences.