Description
Chapter 6 provides various exhibits regarding common-size balance sheets or income statements. Refer to Exhibit 6.3 Common-size Financial Statements in the textbook and review the common-size approach. Describe what “common-size” means and why it is used in financial analysis. Using a company from the approved list, perform common-size analysis on the balance sheets or income statements for at least two fiscal years. What does the information tell you? How can you use that information to compare companies within the same industry to each other?
Participate in follow-up discussion by reviewing the results provided by classmates and comment on the usefulness (or lack thereof) of the common-size approach to analyzing financial performance.
Natasha Sellers
Aug 7, 2023, 10:27 PM
Common size financial statements provide information in the form of a percentage. The common size statement helps analyze review and compare more than one company of multiple sizes, product in a similar way. Common size analysis evaluates the financial statement by converting every line into a percentage. The formula for common sizing is the amount of the line divided by the amount of the base item. The best example of this is the total cost of goods sold divided by the total revenue. Using this methods allows you to see the trends for the assets, and liabilities. This is helpful in recognizing drastic changes in a company’s finances.
Pepsi Company:
2021 2022
Net Sales: $ 79,474 = 100% $ 86,392 = 100%
Gross Profit: 53.35% 53.03 %
Cost of Sales: 46.65% 46.96%
The net sales are at 100% as this is what is left over as a profit after all expenses and bills are paid. The gross profit for Pepsi over the last 2 years has stayed pretty consistent at 53%. The cost of sales for Pepsi from 2021 and 2022 has also stayed around 46%. This means that they are doing something to keep them at a steady pace. The was a better net sale for Pepsi in 2022 compared to 2021. In 2022 they made close to 7 million more than the year before. Looking at the data for the Coca Cola company in 2021 their gross profit was 54.18% and in 2022 it was 58.14% which is slightly higher than Pepsi’s percentages for both 2021 and 2022. The cost of sales for Coca Cola in 2021 was 35.71% and 41.86% in 2022. Pepsi had a higher percentage both years compared to Coca Cola. However, they were not far from each other.
References:
Furhmann, R. (2023, April 13). The Common Size Analysis of Financial Statements. Investopedia. Retrieved August 6, 2023, from https://www.investopedia.com/articles/investing/111413/commonsize-analysis-financial-statements.asp#:~:text=A%20common%20size%20financial%20statement%20displays%20items%20on%20each%20report,changes%20in%20a%20company’s%20financials
Pepsi Co 2022 10-k Filings. (n.d.). Quarterly Earnings. https://investors.pepsico.com/docs/default-source/investors/q4-2022/q4-2022-form-10k_hmielz4d40rd4s16.pdf
Young, S. D., Cohen, J., & Bens, D. A. (2018). Corporate financial reporting and analysis: A global perspective. John Wiley & Sons.
