What is a common size balance sheet?

A balance sheet of general size is an alternative form of traditional financial statements. Where a normal balance sheet expresses information as total financial numbers for a given period, a joint balance sheet shows each number as a percentage of the total value for a class of financial information. For example, if a business lists $1,000 (USD) in accounts receivable and total balance sheet current assets of $8,000, the general size statement would list accounts receivable as 12.Report 5 percent (1,000 / 8,000). Each section of the balance sheet-assets, liabilities, and equity or retained earnings-is presented this way.

Balance sheets are usually divided into the above sections. Each section includes a total figure so managers can determine the amount of assets, liabilities, and equity in their respective companies. Using the figures above, assume that the following appears on a regular balance sheet: $1,200 cash, $1,000 accounts receivable, $5,000 inventory, and $800 marketable securities. The common size balance sheet would present this information as 15 percent cash, 12.5 percent accounts receivable, 62.Show 5 percent in inventory and 10 percent in marketable securities, for a total of 100 percent.

Creating a single-size balance sheet can help business owners and managers spend less time reviewing their company's financial information. While it's important to know the total dollar value of items, showing it as a percentage allows owners and managers to figure out where the business has the most cash. For example, large inventories may indicate lower cash balances. High accounts receivable may mean lower cash and inventory balances, as businesses sell more goods on account than cash sales. Liabilities can also tell similar stories. Significant increases in accounts payable, lines of credit, or other current liabilities may indicate that a company needs external financing for its operations. This situation may lead to difficult future cash flows and other business situations in future years.

The single-size balance sheet also allows business owners and managers to review their long-term assets, long-term mortgages or note loans, and equity information. Although these accounts may not be the focus for short-term purposes, a significant increase or decrease in these items in a business may be cause for concern. In addition, common financial statements provide owners and managers with the ability to compare their companies' financial statements with those of a competitor. By plotting both statements as percentages, the comparison can quickly show which company is weaker or stronger in certain areas.

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