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Bhavesh
Stewart
Kaveshna
Vikas
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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.
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.
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
Vertical analysis
Focuses on the relationships among financial statement items at a given point in time.
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%
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
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) -
(D)
92,221.84
97%
82,162.33
95.15%
Particulars 3)working capital Current Assets cash and bank balance CBLO/reverse repo lending
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%
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.