The document explains the concepts of common-size income statements and balance sheets, which present financial data as percentages for easier comparison. It outlines their advantages, such as facilitating cross-sectional and time-series analyses, while also noting disadvantages, including a lack of qualitative assessment and potential consistency issues in accounting policies. Additionally, the document covers the process and tools involved in financial statement analysis.

1. Common-size Income
Statement and Balance
Sheet

2. What is income statement and
balance sheet?
An income statement or profit and loss account (also
referred to as a profit and loss statement (P&L), statement of
profit or loss, revenue statement, statement of financial
performance, earnings statement, operating statement, or
statement of operations) is one of the financial statements of
a company and shows the company’s revenues and expenses
during a particular period.”
A balance sheet is a financial statement that shows a
company's assets, liabilities and shareholders' equity at a
specific point in time.

3. Common-size statement
 The Common-size statement is the statements in which
amounts of individual items of the income statement and
balance sheet are recorded and are further converted into
a percentage to a common base
 The Common-size income statement is an income
statement in which each amount is expressed as a
percentage of the revenue. It also allows determining how
the various components of the income statement affect a
company's profit.
 A Common-size balance sheet is a balance sheet in which
each amount is expressed as a relative percentage of total
assets, total liabilities, and equity accounts. It is generally
provided as a comparison against previous time periods.

4. Advantages of common-size
statement
 It becomes easy to compare companies as the size does
not matters i.e. cross-sectional analysis
 It helps in time-series analysis
 It also highlights the difference in corporate strategies
 The purpose of common-size financial statements is to
remove those financial differences between companies
that have nothing to do with their primary operations

5. Disadvantages of common-
size statement
 Common-size becomes useless if consistency is not
maintained in accounting policies, concepts, and
conventions.
 A Common-size is based on historical data, therefore, it
does not recognize changes in price level.
 Window dressing is very common in the financial
statement. The Common-size statement does not address
the issue of window dressing.
 The Common-size statement does not give importance to
qualitative elements of the firm.
 The Common-size statement does not ascertain the
Current Ratio, Liquid Ratio, Debt-Equity Capital Ratio,
Capital Gearing Ratio etc. which are very useful in testing
liquidity and solvency position of a firm.

6. Financial statement analysis
 “Financial statement analysis (or financial analysis) is the
process of reviewing and analyzing a company's financial
statements to make better economic decisions. These
statements include the income statement, balance sheet,
statement of cash flows, and a statement of changes in
equity. Financial statement analysis is a method or process
involving specific techniques for evaluating risks,
performance, financial health, and future prospects of an
organization.”(White, Gerald I.; Sondhi, Ashwinpaul; Fried,
Dov (1998)).

7. Process of Financial
Statement Analysis
 Articulate the purpose and context of the analysis.
 Collect input data.
 Process data.
 Analyze/interpret the processed data
 Develop and communicate conclusions and
recommendations (e.g., with an analysis report).
 Follow-up”

8. Tools of Financial statement
analysis
 Ratio analysis
 Common-size analysis
 Comparative analysis
 Trend analysis
 Use of graph
 Regression analysis

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