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Monday, November 21, 2011

Common-Size Income Statements In Excel

A common technique among financial analysts is to examine common-size
financial statements. Common-size financial statements display the data not as
dollar amounts, but as percentages. These statements provide the analyst
with two key benefits:

1. They allow for easy comparisons between firms of different sizes.

2. They can aid in spotting important trends which otherwise might
be not be obvious when looking at dollar amounts.

A common-size income statement is one which shows all of the data as a
percentage of the firm’s total revenues. Excel makes the building of
common-size financial statements easy, as we’ll see with the EPI data.

To begin, we need to make room for the common-size income statements.
Select any cell in column B, or all of column B, by clicking on the column
header. From the menus choose Insert Columns which will insert a
new column to the left of the selected column. This new column will
need to be resized so that it is approximately the same size as column C,
which was formerly column B. Now, repeat this process with column D
(the 2003 data). In B4 and D4 enter the labels: 2004% and 2003%,
respectively. We will start building our common-size income statements
with the 2004 data. In B5 enter the formula: =C5/C$5.4 The resulting
display is likely to be nonsensical

because the formatting will be the same as the cells in column C.
So change the number format (Format Cells) to a Percentage
format with 2 decimal places. You should now see that the result
is 100.00%. Copy B5, select cells B6:B15, and then
choose Edit Paste. You have now created a common-size
income statement for 2004.

To create the common-size income statement for 2003, simply copy
B5:B15 and then paste into D5.

You can easily see why this is a useful tool for analysts. By looking
at row 8, you can instantly see that Selling and G&A expenses
have risen quite sharply in 2004 relative
to sales. Also, looking at row 15 instantly shows that the firm’s net profit margin

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