Vertical Common Size Balance Sheet

Bhavesh

Stewart

Kaveshna

Vikas

GROUP MEMBERS

Monit

Arif

Sorabh

Chaitali

Smith

What is?
Common size ratios are used to compare financial statements of different size companies or of the same company over different periods. By expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.

The common size ratio for each line on the financial statement is calculated as follows:
Item of Interest Common Size ratio = *100

Reference Item

For example
For example, if the item of interest is inventory and it is referenced to total assets (as it normally would be), the common size ratio would be:

Inventory
Common Size Ratio for Inventory= *100

Total Assets

NATURE
Year-to-year comparisons are useful in understanding an organizations performance. But as the size of an organization changes, year-to-year comparisons of amounts can be misleading.

Comparisons with competing organizations of different sizes are also difficult to interpret with amounts.
Thus, to adjust to size differences, analysts and accountants have developed common-size financial statements.

PURPOSE
Common-size statements which are also known as component percentage or 100 percent statements enable analyst to:
Comprehend or visualize the changes in individual items that have taken place from year to year in relation to the total assets, total liabilities and owners equity or total net sales. Compare statements of two or more companies or statement of one company with the statements for an entire industry and evaluate their current financial position and operating results. Point out efficiencies and inefficiencies that might otherwise go unnoticed.

FEATURES OF COMMON SIZE STATEMENT

A common size statement analysis indicates the relation of each component to the whole. In case of a Common Size Income statement analysis Net Sales is taken as 100% and in case of Common Size Balance Sheet analysis total funds available/total capital employed is considered as 100%. It is used for vertical financial analysis and comparison of two business enterprises or two years financial data.

Contd..
A common size analysis is a type of ratio analysis where in case of income statement sales is the denominator (base) and in case of Balance Sheet funds employed or total net assets is the denominator (base) and all items are expressed as a relation to it. In case of common size statement analysis the absolute figures are converted to proportions for the purpose of inter-firm as well as intra-firm analysis. Absolute figures from the financial statement are difficult to compare but when converted and expressed as percentage of net sales in case of income statement and in case of Balance Sheet as percentage of total net assets or total funds employed it becomes more meaningful to relate.

Guidelines in the Interpretation of Common-size balance sheet

A common-size balance sheet shows the percent of total assets that has been invested in each type or kind of asset. These percentages may be compared with those of a competitor or the industry to determine whether the firm has over or underinvested in one or more of its assets. The common-size statement will also show the distribution of liabilities and equity, i.e..the sources of the capital invested in the assets. The percentage of current assets may also be related to the percentage of current liabilities to determine debtpaying capacity of the company.

Limitations
As with financial statements in general, the interpretation of common size statements is subject to many of the limitations in the accounting data used to construct them. For example:
1. Different accounting policies may be used by different firms or within the same firm at different points in time.
Adjustments should be made for such differences. 2. Different firms may use different accounting calendars, so the accounting periods may not be directly comparable

Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the same point in time. A common-size analysis is especially useful when comparing companies of different sizes. It often is insightful to compare a firm to the best performing firm in its industry(benchmarking). A firm also can be compared to its industry as a whole. To compare to the industry, the ratios are calculated for each firm in the industry and an average for the industry is calculated. Comparative statements then may be constructed with the company of interest in one column and the industry averages in another. The result is a quick overview of where the firm stands in the industry with respect to key items on the financial statements

Vertical analysis

Focuses on the relationships among financial statement items at a given point in time.

It is a vertical analysis in which each financial statement item is expressed as a percentage.

Common size statements

Proforma of a vertical balance sheet

Sources of funds

Application of funds

A)Shareholders funds Share capital Add: reserves and surplus Less: Fictitious assets Borrowed funds Secured loans Unsecured loans

Sources of Funds

Fixed assets

Tangible
Intangible

Long term Investments Working capital Current assets Less: Current liabilities

Application of Funds

Let Us Study The Vertical Common Size Balance Sheet Of HDFC Mutual Fund For The Financial Year 2011 And 2012

Particulars

As on march 2011

As on march 2012

Rs.

%age

Rs.

%age

A)Sources of funds: 1)share capital add: reserves and surplus 14,761.18 15.52% 15,047.38 17.4%

unit premium reserves

other reserves (A) 2)Borrowed Funds Total capital employed=(A+B) (B)

3,038.41
77,281.08 95080.67 95080.67

3.20%
82.28 100 100

2,690.42
68,608.51 86,346.31 86,346.31

3.11%
79.45 100% 100

Particulars

As on march 2011 Rs. %age

As on march 2012 Rs. %age

B)Application of funds: 1)Fixed Assets 2)Investments equity shares 92,088.93 132.91 96.85% 0.14% 82,028.28 134.05 95% 0.16% (C) -

other debentures and bonds

(D)

92,221.84

97%

82,162.33

95.15%

Particulars 3)working capital Current Assets cash and bank balance CBLO/reverse repo lending

As on march 2011 Rs. %age

As on march 2012 Rs. %age

2580.44 1,161.75

2.71% 1.22%

384.28 4335.33

0.44% 5.02%

others
(e) Less: Current Liabilities Other current liabilities and provisions (e-f)=G Total Asset Employed=(C+D+G) (f)

44.73
3786.92

0.04%
3.99%

32.11
4751.72

0.04
5.50%

(877.09) 2909.83 95,080.67

0.92% 3.06% 100%

(567.74) 4183.98 86,346.31

0.65% 4.84% 100%

Comments:
Share capital was in increased by 1.88% in 2012 as compared to 2011. Unit premium decreased by 0.09% in 2012 as compared to 2011. other reserves decreased by 2.83% in 2012 as compared to 2011. Investment decreased by2.15% in 2012 as compared to 2011. Current assets increased by 1.51% in 2012 as compared to 2011. Current liabilities increased by 1.78% in 2012 as compared to 2011.