Write a short note on common size financial statements.

A common size financial statement displays line items as a percentage of one selected or common figure. Creating common size financial statements makes it easier to analyze a company over time and conduct a peer comparison. Using common size financial statements are helpful in spotting trends that a raw financial statement may not uncover. Financial statements in currency amounts can easily be converted to common size statements using a spreadsheet. Common Size Balance Sheet Analysis: The common figure for a common size balance sheet analysis is total assets. It is also possible to use total liabilities to indicate where a Company's obligations lie and whether it is being conservative or risky in managing its debts. One can conclude if debt level is too high, excess cash is being retained on the balance sheet or inventories are blocking working capital funds. The Goodwill level on a balance sheet also helps indicate the extent to which a company has relied on acquisitions for growth. Common Size Income Statement analysis: The common figure for an income statement is total sales. This is like calculating profit margins. For instance - net profit margin is net income divided by sales - which also happens to be a common size analysis.