Component percentages

One technique in financial statement analysis is known as vertical analysis. Vertical analysis results in common-size financial statements.

A common-size balance sheet is a balance sheet where every dollar amount has been restated to be a percentage of total assets. We will illustrate this by taking Example Company’s balance sheet (shown above) and divide each item by the total asset amount $770,000. The result is the following common-size balance sheet for Example Company:

Example Company
Balance Sheet
December 31, 2005

A common-size income statement presents all of the income statement amounts as a percentage of net sales. Below is Example Corporation’s common-size income statement after each item from the income statement above was divided by the net sales of $500,000: