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# Why Accounting Education Volunteer

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For analysis of common size balance sheet, we take two companies balance sheet. After this, we convert its all figures in the proportion of 100%. For this, we use following simple formula.

= Asset Figure of balance sheet/ Total Assets X 100
or
= Liability Figure of balance sheet/ Total Liabilities X 100

Following is the sample which is used for common size balance sheet analysis.

 Common Size Balance Sheet
1st Point of Analysis : Resources of Buying Fixed Assets

When both company's balance sheet will convert in the proportion of 100. It becomes easy to analyze it. We can see that A Ltd company has fixed asset which is 95% of its total assets but its share capital is 75% of total liabilities. It means for buying 20% more fixed assets, it has used long term loan. This is not good, if company has to pay high rate of interest and return on fixed asset is less because company will have to pay same fixed interest on loan. When we see the balance sheet of B Ltd company, we find that 60% of share capital is used for buying 60% fixed assets. This position is good because company is using its own capital without paying fixed interest to loan holders.

2nd Point of Analysis : Working Capital

Working capital position of B Ltd is better than A Ltd because in B Ltd, there is 10% excess of current assets  over current liabilities which can easily use for paying current liabilities and other day to day expenses. But working capital position of A Ltd is not good because company has no working capital.

3rd Point of Analysis : Current Assets

When we go to the detail of current assets, we will check which company is using its fund for which current assets. For example B company's 40% current assets in inventory. That is not good current position because we need some cash for payment of expenses. It is not necessary, we will able to sell all our inventory in one day. Moreover, we will not get interest on over-stocking. It will only increase our cost of rent of storage.

4th Point of Analysis : Rule of Thumb

Time to time accounting and finance experts make some rule of thumb. If both balance sheet in the % form, we can analyze on the basis of rule of thumb. For example, suppose 65% of total assets should be in fixed form. Now, we see B Ltd is good because it is near to rule of thumb.

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Accounting Education: Common Size Balance Sheet Analysis
Common Size Balance Sheet Analysis
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Accounting Education
http://www.svtuition.org/2011/09/common-size-balance-sheet-analysis.html
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