Common Size Financial Statement

What is a common size financial statement? A company financial statement displays all items as percentages of a common base figure. For example the common size income statement that reports the revenue and expense amounts as percentages of net sales. The common size financial statement involves two balance sheet statement and income statements. These two become “common size” when their dollar amounts are expressed as percentages. For example a common balance sheet  will report all of the balance sheet amount as a percentage of the total assets if say cash was $80 and total assets were $1000 then cash will appear as 35%.I the current available liabilities were $180 then on the common size statement they will appear as 18%.The benefit of common size financial statement is that they allow one to compare the financial statements of large companies with the financial statements of smaller companies using percentages not dollars hence the name “common size”.

Wal-Mart common size financial statement vs. Target common size financial market

Target Corporation is perceived midrange department store and Wal-Mart is perceived lower end department store. both offer the same categories of merchandise, but Target is a perceived a higher grade of merchandise than Wal-Mart. Target’s slogan is “Expect more ,pay less” compared to Wal-Mart ‘s slogan “Low prices Every day. On everything” . To discover which of these two companies is truly the least expensive for their customers, and why turn to each company’s income statement.

This worksheet divides each of the company’s income statement by their revenues thus starts out at 100% for both companies (yellow) subtract the cost of goods sold from this to obtain the Gross margin (orange).The initial view of those figure suggest that Target  is obtaining its goods at lower cost than Wal-Mart but that is not correct , instead Wal-Mart is charging its customers a lower price sales price for its goods than Target which means that its revenue on each good is lower and its cost of goods sold would then appear to be higher. Factor in that Wal-Mart is probably paying a lower wholesale price than Target for its goods and you can see that Wal-Mart must be offering its customers  retail prices that are at least 5% lower than target  assuming equal cost of goods sold  Wal-Mart’s revenue must  backed down 8% to balance out its gross margin. Looking at net income (green) Wal-Mart’s profit margin is higher means that Wal-Mart has less overhead than Target either in terms of less staff, lower salaries or lower office expenses. Since sales per employee are about the same in both implies that it is salaries and/or office expenses that are higher at Target. Clearly Wal-Mart is a superior company in that it gives lower prices to customers, gives it investors higher net income and runs its operations considerably leaner than target In this income statement analysis Targets credit card  revenues were removed from its income as was Wal-Mart’s membership revenue thus bringing both  income statements to a purely retail level. Wal-Mart charge a membership fee which is free cash that accounts for 19% of their earnings before tax and Target credit card portfolio accounts for 41% of their earnings before tax.