PURPOSE OF COMMON SIZE STATEMENTS


Common Size Statements are of great value in forming the opinion regarding the progress of business firm. Following are the main purposes of preparing common size statements:

1.     Presenting the change in various items in relation to total assets or total liabilities or net sales: One of the major drawback of comparative financial statements is that they do not present the change in various items in relation to total assets or total liabilities or net sales. This drawback is removed through the preparation of Common size statements.

2.    Establishing a relationship: Over a period of time, a relationship has been established between various items of the Profit and Loss Account i.e. Income Statement to sales and various items of Balance Sheet to total assets or total liabilities. Meaningful conclusions can be drawn by studying the changes in relationship.

3.    Providing a common base for comparison: Common size statements provide a common base for comparison. Financial Statements of different periods and different firms can be converted into uniform common size format irrespective of the size of individual items. Thus, the Common size statements facilitate the comparison of profitability and financial position of two or more business over a period of time.