Understanding the Difference Between a Consolidated Balance Sheet and a Common Size Balance Sheet
In the world of financial statement analysis, two types of balance sheets are commonly discussed: the consolidated balance sheet and the common size balance sheet. These two tools serve very different purposes and provide unique insights into an organization's financial health, and yet they can be used together for a comprehensive analysis.
Introduction to the Common Size Balance Sheet
A common size balance sheet is a financial statement that shows each line item of the balance sheet as a percentage of a base amount, typically total assets, total equity, or total liabilities and equity. This format allows users to compare the relative sizes of different components of the balance sheet, making it easier to understand the relative positions of assets, liabilities, and equity. It is also known as a vertical analysis, where each figure on the balance sheet is compared with a base figure, usually the total assets or total liabilities and equity.
To create a common size balance sheet, the following steps are taken:
Identify the total amount of the base item (assets, liabilities, or equity). This is the benchmark against which other items are compared. Divide each line item of the balance sheet by the base amount and multiply by 100 to express it as a percentage. Present the results in a tabular format with columns for each line item and a row for each percentage value.Introduction to the Consolidated Balance Sheet
A consolidated balance sheet is a financial statement used in corporate finance to consolidate the assets, liabilities, and equity of a parent company and its subsidiaries into a single statement. This type of balance sheet provides a clear picture of the overall financial standing of a parent company and its affiliated entities, thereby eliminating the need to separately analyze the financial statements of each subsidiary.
The process of creating a consolidated balance sheet involves:
Collecting the balance sheet data of the parent company and all subsidiaries. Eliminating intercompany transactions and balances to avoid double-counting. Combining the balance sheet figures of all entities into a unified statement.Comparing and Contrasting Both Balance Sheets
While a common size balance sheet provides a relative comparison of the different components of a balance sheet, a consolidated balance sheet gives a detailed view of the financial health of a parent company and its affiliated entities. These two balance sheets are not mutually exclusive; they complement each other, providing a more complete picture of a company's financial landscape.
When to Use Each Balance Sheet
A common size balance sheet is particularly useful for internal management and external investors who want to compare the relative positions of different components of the balance sheet over time or across different companies. This type of balance sheet is particularly helpful in identifying trends and making relative comparisons without the need to reference absolute values.
A consolidated balance sheet, on the other hand, is crucial for understanding the overall financial health of a parent company and its subsidiaries. It is often required for public disclosures and regulatory filings, as it provides a comprehensive view of the combined financial position of a group of companies.
Conclusion
Both the common size balance sheet and the consolidated balance sheet play critical roles in financial statement analysis. While a common size balance sheet focuses on relative comparisons and vertical analysis, a consolidated balance sheet provides a comprehensive view of the combined financial position of a parent company and its subsidiaries. By understanding how to use both types of balance sheets, financial analysts, investors, and managers can gain valuable insights into a company's financial health.