Common-Size Financial Statement Analysis Using Excel

Case scenario: You are working at a small business that has been mostly stable. You want to analyze the financial statements of the past five years to examine the trends over time and compare the percentages of income statement items relative to overall sales. You also want to highlight cells according to whether the calculated ratio increases or decreases more than a specified amount.

Line Items	Year 1	Year 2	Year 3	Year 4	Year 5
Net Sales	$125,000.00	$115,000.00	$105,000.00	$135,000.00	$145,000.00
Less: Cost of Goods Sold	($60,000.00)	($65,000.00)	($60,000.00)	($70,000.00)	($65,000.00)
Gross Margin	$65,000.00	$50,000.00	$45,000.00	$65,000.00	$80,000.00
Less: Operating Expenses	($35,000.00)	($27,500.00)	($25,000.00)	($40,000.00)	($47,500.00)
Less: Taxes	($11,000.00)	($8,200.00)	($7,500.00)	($10,500.00)	($12,500.00)
Net Income	$19,000.00	$14,300.00	$12,500.00	$14,500.00	$20,000.00

You will build a spreadsheet that performs common-size analysis using five years of a company's income statements. Specifically, you will create two sheets within the workbook, one for the horizontal analysis and one for the vertical analysis. Further, you will use conditional formatting to visually differentiate between cells that reflect increases and cells that reflect decreases over a specified percentage. 1. I. ='Financial Statement Data'!$B2/'Financial Statement Data'!B2 II. ='Financial Statement Data'!B2/'Financial Statement Data'!$B2 III. ='Financial Statement Data'!B2/'Financial Statement Data'!B$2 IV. ='Financial Statement Data'!B2/'Financial Statement Data'!$B$2

2. I. =ABS('Financial Statement Data'!$B2/'Financial Statement Data'!B2) II. =ABS('Financial Statement Data'!B2/'Financial Statement Data'!$B2) III. =ABS('Financial Statement Data'!B2/'Financial Statement Data'!B$2) IV. =ABS('Financial Statement Data'!B2/'Financial Statement Data'!$B$2)

new sheet but it will have no data. I. ='Financial Statement Data'!\$B2/'Financial Statement Data'!B2 II. ='Financial Statement Data'!B2/'Financial Statement Data'!\$B2 III. ='Financial Statement Data'!B2/'Financial Statement Data'!B $2 IV. ='Financial Statement Data'!B2/'Financial Statement Data'!\$B\$2 2. Vertical analysis: Create another new sheet to perform the vertical analysis, comparing each year's item to that year's net sales: a. Instead of creating every formula one by one, how can you create just one formula in cell B2 that can be copied and pasted to all cells? Note that there are negative values in the Financial Statement Data sheet. Choose the correct formula. I. =ABS('Financial Statement Data'!\$B2/'Financial Statement Data'!B2) II. =ABS('Financial Statement Data'!B2/'Financial Statement Data'!\$B2) III. =ABS('Financial Statement Data'!B2/'Financial Statement Data'!B\$2) IV. =ABS('Financial Statement Data'!B2/'Financial Statement Data'! $B$2 )