Vertical Common Size Balance Sheet

Stewart

Kaveshna

Arif

Sorabh

Smith

GROUP MEMBERS

Bhavesh

Vikas

Monit

Chaitali

The Company We Chose Is

HDFC Mutual Funds

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 iscalculated 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 organization’s 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.

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.

PURPOSE

FEATURES OF COMMON SIZE STATEMENT

A common size statement analysis indicates the relation of each component to the whole.

In case of a Common Size Income statement analysis Net Sales is taken as 100% and in case of Common Size Balance Sheet analysis total funds available/total capital employed is considered as 100%.

It is used for vertical financial analysis and comparison of two business enterprises or two years financial data.

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.

Guidelines in the Interpretation of Common-size balance sheet

A common-size balance sheet shows the percent of total assets that has been invested in each type or kind of asset.

These percentages may be compared with those of a competitor or the industry to determine whether the firm has over or underinvested in one or more of its assets.

The common-size statement will also show the distribution of liabilities and equity, i.e..the sources of the capital invested in the assets.

The percentage of current assets may also be related to the percentage of current liabilities to determine debt-paying capacity of the company.

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

Comparisons Between Companies (Cross-Sectional Analysis)

Common size financial statements can be used to compare multiple companies at the same point in time.

A common-size analysis is especially useful when comparing companies of different sizes.

It often is insightful to compare a firm to the best performing firm in its industry(benchmarking).

A firm also can be compared to its industry as a whole.

To compare to the industry, the ratios are calculated for each firm in the industry and an average for the industry is calculated.

Comparative statements then may be constructed with the company of interest in one column and the industry averages in another.

The result is a quick overview of where the firm stands in the industry with respect to key items on the financial statements

Vertical analysis

Common size

statements

• Focuses on the relationships among financial statement items at a given point in time.

• It is a vertical analysis in which each financial statement item is expressed as a percentage.

Proforma of a vertical balance sheet

Sources of funds Application

of funds

Sources of

Funds

A)Shareholders funds

Share capitalAdd: reserves and surplusLess: Fictitious assets

Borrowed funds

Secured loansUnsecured loans

Application of

Funds

Fixed assets

Tangible Intangible

Long term InvestmentsWorking capital

Current assets Less: Current liabilities

Let Us Study The Vertical Common Size Balance Sheet Of

HDFC Mutual Fund

For The Financial Year

2011 And 2012

ParticularsAs on march 2011 As on march 2012

Rs. %age Rs. %age

A)Sources of funds:

1)share capital 14,761.18 15.52% 17.4%

add: reserves and surplus

unit premium reserves 3,038.41 3.20% 3.11%

other reserves 77,281.08 82.28 79.45

(A) 95080.67 100 86,346.31 100%

2)Borrowed Funds (B) - - - -

Total capital employed=(A+B) 95080.67 100 86,346.31 100

Particulars As on march 2011 As on march 2012

Rs. %age Rs. %age

B)Application of funds:

1)Fixed Assets (C)

- - - -

2)Investments

• equity shares 92,088.93 96.85% 82,028.28 95%

• other debentures and bonds

132.91 0.14% 134.05 0.16%

(D)

92,221.84 97% 82,162.33 95.15%

Particulars As on march 2011 As on march 2012

Rs. %age Rs. %age

3)working capital

Current Assets

• cash and bank balance 2580.44 2.71% 384.28 0.44%

• CBLO/reverse repo lending 1,161.75 1.22% 4335.33 5.02%

• others 44.73 0.04% 32.11 0.04

(e)

3786.92 3.99% 4751.72 5.50%

Less: Current Liabilities

• Other current liabilities and provisions (f)

(877.09) 0.92% (567.74) 0.65%

(e-f)=G

2909.83 3.06% 4183.98 4.84%

Total Asset Employed=(C+D+G) 95,080.67 100% 86,346.31 100%

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.