The next thing we might want to do with Prufrock’s financial statements is to compare them to those of other, similar, companies. We would immediately have a problem, however. It’s almost impossible to directly compare the financial statements for two companies because of differences in size. For example, Ford and GM are obviously serious rivals in the auto market, but GM is much larger (in terms of assets), so it is difficult to compare them directly. For that matter, it’s difficult to even compare financial statements from different points in time for the same company if the company’s size has changed. The size problem is compounded if we try to compare GM and, say, Toyota. If Toyota’s financial statements are denominated in yen, then we have a size and a currency difference. To start making comparisons, one obvious thing we might try to do is to somehow standardize the financial statements. One very common and useful way of doing this is to work with percentages instead of total dollars. In this section, we describe two different ways of standardizing financial statements along these lines.
Common-Size Balance Sheets
– Compute all accounts as a percent of total assets
• Common-Size Income Statements
– Compute all line items as a percent of sales
• Standardized statements make it easier to
compare financial information, particularly as the company grows
• They are also useful for comparing companies of different sizes, particularly within the same industry