Question
Explain common size statement.
✓
Answer
In this method profit and loss statement and balance sheet of two years or more than two years can be compared with the financial statements of current year with the help of this method.
- Here, profit and loss statement and balance sheet of current year is compared with the profit-loss statement and balance sheet of previous year.
- This analysis is in the vertical form In this statement net sales is taken as the base for profit and loss $= 100\%$ is taken.
- Profit of the business is based on maximum sales and minimum cost.
- What is the proportion for each expense of sales can be availed from this analysis.
- Necessary actions are taken so that the objective of maximization of profit can be achieved.
- In case of balance sheet as base, total or balance sheet $18$ considered and it is assumed as $100\%.$
- Like comparative statement there are six columns in the common size statement.
- In the first column the information of different components of profit and loss statement and balance sheet are disclosed.
- The third and fourth columns discloses the amount of expenses/revenues/liabilities/assets of the previous and current year.
- In the fifth and sixth columns of profit and loss statement, the percentage of revenue/ expenses of two years are calculated and disclosed. The difference between two percentage of assets/liabilities are used for the analysis and interpretation The formula to determine percentage are as follows:
- For profit and loss statement $=$
- For balance sheet $=$
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