{"id":4384,"date":"2020-03-05T17:36:00","date_gmt":"2020-03-05T17:36:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=4384"},"modified":"2026-03-11T13:00:04","modified_gmt":"2026-03-11T13:00:04","slug":"convert-common-size-balance-sheets","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/convert-common-size-balance-sheets\/","title":{"rendered":"Convert Balance Sheets to Common-size Balance Sheets"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which statement about common-size analysis is incorrect?\",\n    \"text\": \"Which of the following statements about common-size analysis is incorrect?\\n\\nA. In a vertical common-size analysis, each balance sheet item is stated as a percentage of total assets.\\nB. A common-size analysis can be used to compare a company\u2019s balance sheet composition over time.\\nC. A common-size analysis cannot assist with making a comparison across companies in the same industry.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C. Common-size analysis is commonly used to compare financial statements across companies within the same industry because expressing items as percentages standardizes the statements and makes them easier to compare.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"In a common-size balance sheet, each line item is expressed as a percentage of what?\",\n    \"text\": \"To convert a regular balance sheet into a common-size balance sheet, each line item is stated as a percentage of:\\n\\nA. Total assets\\nB. Total equity\\nC. Total liabilities\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. In a common-size balance sheet, each item is expressed as a percentage of total assets. This standardization allows analysts to compare balance sheet structures across companies and across time.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/VKYuCGCea20\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Converting a company\u2019s balance sheet into a common-size balance sheet is a very useful tool for providing insight into a company\u2019s liquidity as well as its solvency.<\/p>\n<p>Common-sizing the balance sheet can assist with time-series analysis by comparing the company\u2019s balance sheet composition over time. It can also assist with cross-sectional analysis by looking across companies in the same industry or sector. Indeed, the cross-sectional analysis may even highlight differences that exist between two or more companies\u2019 strategies.<\/p>\n<h2><strong>Common-sizing the Balance Sheet<\/strong><\/h2>\n<p>There are two primary methods for common-sizing the balance sheet: vertical common-size analysis, and horizontal common-size analysis.<\/p>\n<p>The vertical common-size analysis involves stating each balance sheet item as a percentage of total assets, while the horizontal common-size analysis reflects quantities on the balance sheet in terms of a base-year value of choice. The vertical common-size analysis is, however, the more popular of the two methods.<\/p>\n<h3><strong>Example of a Vertical Common-size Analysis<\/strong><\/h3>\n<p>$$ \\begin{array}{l|r|r} {} &amp; \\bf {\\text{Dec }31,2016} &amp; \\bf{Common-} \\\\ \\text{} &amp; \\bf{($)} &amp; \\bf{size} \\\\ {} &amp; {} &amp; \\bf{\\text{balance-}} \\\\ \\textbf{Assets} &amp; {} &amp; \\bf{\\text{sheet }(\\%)} \\\\ \\hline \\text{Current Assets} &amp; {} &amp; {} \\\\ \\hline {\\quad \\quad \\text{Cash and cash equivalents}} &amp; {100,000} &amp; {0.8} \\\\ \\hline {\\quad \\quad \\text{Short-term marketable securities}} &amp; {1,234,678} &amp; {9.7} \\\\ \\hline {\\quad \\quad \\text{Accounts receivable}} &amp; {52,000} &amp; {0.4} \\\\ \\hline {\\quad \\quad \\text{Inventory}} &amp; {1,170,356} &amp; {9.2} \\\\ \\hline \\text{Total current assets} &amp; {2,557,034} &amp; {20.0} \\\\ \\hline \\text{Property, plant and equipment} &amp; {6,834,190} &amp; {53.6} \\\\ \\hline \\text{Intangible assets} &amp; {3,370,041} &amp; {26.4} \\\\ \\hline \\textbf{Total assets} &amp; \\bf{12,761,265} &amp; \\bf {100.0} \\\\ \\hline \\textbf{Liabilities and shareholders&#8217; equity} &amp; {} &amp; {} \\\\ \\hline \\text{Current liabilities} &amp; {} &amp; {} \\\\ \\hline {\\quad \\quad \\text{Accounts payable}} &amp; {3,825,396} &amp; {30.0} \\\\ \\hline \\text{Total current liabilities} &amp; {3,825,396} &amp; {30.0} \\\\ \\hline \\text{Bonds payable} &amp; {3,771,894} &amp; {29.6} \\\\ \\hline \\text{Total liabilities} &amp; {7,597,290} &amp; {59.5} \\\\ \\hline \\text{Total shareholders&#8217; equity} &amp; {5,163,975} &amp; {40.5} \\\\ \\hline \\textbf{Total liabilities and shareholders&#8217; equity} &amp; \\bf {12,761,265} &amp; \\bf {100.0} \\\\ \\end{array} $$<\/p>\n<p>An analysis of data in the\u00a0table above reveals that property, plant, and equipment, at 53.6%, make up the lion\u2019s share of the company\u2019s assets. The company does not have much cash and cash equivalents (0.8%), and most of its debt is in the form of accounts payable (30.0%). Also, there is no working capital as current assets (20.0%) is less than current liabilities (30.0%).<\/p>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>Which of the following statements is incorrect?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>In a vertical common-size analysis, each balance sheet item is stated as a percentage of total assets.<\/li>\n<li>A common-size analysis can be used to compare a company\u2019s balance sheet composition over time.<\/li>\n<li>A common-size analysis cannot assist with making a comparison across companies in the same industry.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>C<\/strong>.<\/p>\n<p>Options A and B are accurate statements. However, option C is inaccurate because common-size analysis can, in fact, assist with making a comparison across companies in the same industry.<\/p>\n<h2><strong>Question 2<\/strong><\/h2>\n<p>To convert a regular balance sheet into a common-size balance sheet, each line item is stated as a percentage of:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>Total assets.<\/li>\n<li>Total equity.<\/li>\n<li>Total liabilities.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Making a common-size balance sheet requires stating each line item as a percentage of total assets.<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>Converting a company\u2019s balance sheet into a common-size balance sheet is a very useful tool for providing insight into a company\u2019s liquidity as well as its solvency. Common-sizing the balance sheet can assist with time-series analysis by comparing the company\u2019s&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-4384","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Common-size Balance Sheets | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn how to convert financial statements into common-size balance sheets for better analysis of liquidity, solvency, and capital structure.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/convert-common-size-balance-sheets\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Common-size Balance Sheets | CFA Level 1 - 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