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Posted: September 24th, 2023
Chapter 6 provides various exhibits regarding common-size balance sheets or income statements
Chapter 6 provides various exhibits regarding common-size balance sheets or income statements. Refer to Exhibit 6.3 Common-size Financial Statements in the textbook and review the common-size approach. Describe what “common-size” means and why it is used in financial analysis. Using a company from the approved list, perform common-size analysis on the balance sheets or income statements for at least two fiscal years. What does the information tell you? How can you use that information to compare companies within the same industry to each other?
Participate in follow-up discussion by reviewing the results provided by classmates and comment on the usefulness (or lack thereof) of the common-size approach to analyzing financial performance.
A common-size financial statement is a form of income statement or balance sheet in which each line item is reported as a percentage of the base figure (Hayes, 2020). “Common-size” refers to the percentage of the common base figure of total sales revenue in a common-size financial statement. Such statements provide an easy analysis between different companies, of various sizes, over a specific period in percentages, in an “apples-to-apples way” (Hayes, 2020) – making them a “common-size” fit for easy comparison. Furthermore, the figures in a common-size financial statement are reduced to percentages of sales or assets, making the comparison between multiple companies quick and easy, resulting in it becoming a powerful tool for the financial analysis of a company. It works similar to the ratio analysis of a profit and loss statement (Furhmann, 2023).
To elaborate further, let’s use the example of PepsiCo. In 2022, per the income statement of PepsiCo. Its gross profit was $45,816 million, its cost of sales was $40,576 million, its taxes were $1,727 million, and its net income was $8,978 million. Hence, its common-size statement would read those values as
Gross Profit: 100%
Cost of Sales: 88.5%
Taxes: 3.8%
Net Income: 19.6%
Similarly, in 2021, per the income statement of PepsiCo. Its gross profit was $42,399 million, its cost of sales was $37,075 million, its taxes were $2,142 million, and its net income was $7,679 million. Hence, its common-size statement would read those values as
Gross Profit: 100%
Cost of Sales: 87.4%
Taxes: 5%
Net Income: 18.1%
The common-size statement makes the financial analysis for PepsiCo easy and transparent. From 2021 to 2022, its Cost of Sales increased from 87.4% to 88.5%, its taxes decreased from 5% to 3.8%, and its net income increased from 18.1% to 19.6%, showing that financially the company is moving in a positive direction.
Furthermore, we can use the common-size financial statement of a competitor from the same industry to make that same comparison between the two companies. Let us use Coca-Cola Company as an example of PepsiCo’s competitor. In 2022, per the income statement of Coca-Cola Company, its gross profit was $25,004 million, its cost of sales was $18,000 million, its taxes were $2,115 million, and its net income was $9,571 million. Hence, its common-size statement would read those values as
Gross Profit: 100%
Cost of Sales: 72%
Taxes: 8.5%
Net Income: 38.3%
To conclude, for the fiscal year 2022, Coca-Cola Company’s Cost of Sales was lower when compared to PepsiCo., and the net income was significantly higher, making Coca-Cola Company comparatively a financially healthier one when compared to PepsiCo.
Reference:
The Coca-Cola Company. (2022). The Coca-Cola Company Form 10-K. https://investors.coca-colacompany.com/filings-reports/annual-filings-10-k/content/0000021344-23-000011/0000021344-23-000011.pdf
Furhmann, R. (2023, April 13). The common size analysis of financial statements. Investopedia: Dotdash Meredith. https://www.investopedia.com/articles/investing/11…
Hayes, A. (2020, November 25). Common size financial statement: Definition, and example. Investopedia: Dotdash Meredith. https://www.investopedia.com/terms/c/commonsizefin…
PepsiCo. (2022). PepsiCo Form 10-K. https://pepsico.gcs-web.com/static-files/d051bdd6-…
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