A CFO sees revenue up 16% and asks whether that is good news. One line in one period cannot say. Comparative analysis turns raw statements into findings by scaling every line, tracking it across periods, and naming the driver behind the trend.
Common-size restates every line as a percent of a base in the same period. The base is fixed by statement: income statement uses net sales (revenue) = 100%; balance sheet uses total assets = 100% (equivalently, total liabilities + equity = 100%). Cost of goods sold (COGS) at $60M on $100M revenue is 60%. Inventory at $8M on $80M total assets is 10%. Once everything is a percent, a $50M firm compares directly to a $5B firm because size is normalized out.
KEY: The income-statement base is revenue, the balance-sheet base is total assets. Scaling expenses to net income or assets to equity is a common distractor.
What common-size statements reveal:
- Cost structure. COGS rising from 60% to 64% of revenue while gross margin compresses points to pricing pressure or input inflation.
- Asset mix. Inventory climbing from 10% to 16% of total assets while PP&E falls signals a working-capital build.
Common mistakes
- Common-sizing to the wrong base. Income statement scales to revenue; balance sheet scales to total assets. Scaling expenses to net income or assets to equity is wrong and the exam lists it as a distractor.
- Computing CAGR with the wrong n. Four data points (2022, 2023, 2024, 2025) give n = 3 compounding periods. Use the gap count, not the data-point count.
- Reporting a percent change against a negative or zero base. A %Δ of −2,500% versus a $(50) base is math, not information. Report N/M and the dollar change.
Bottom line
- Vertical (common-size) analysis scales each income-statement line to net sales = 100% and each balance-sheet line to total assets = 100%, normalizing across firm sizes.
- Horizontal analysis computes dollar and percent change across periods using a rolling base (prior year) or a fixed base (index year = 100).
- Single-period growth = (Current − Base)/Base. CAGR = (End/Base)^(1/n) − 1, where n counts gaps between years, not data points.
- Index numbers read as cumulative percent of base: index 162 means 62% above base, not 62% growth this year.
Exam shortcut
When the question compares companies of different sizes or asks about cost structure, the answer is vertical (common-size) analysis. Scale to revenue (IS) or total assets (BS). When the question asks about multi-year strategic progress, use fixed-base horizontal analysis (index = 100). For operational variance versus last year, use rolling-base year-over-year percent change.
The full lesson (about 1,899 words, 13 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- 2A1
Browse all free CMA Part 2 lessons or jump into free CMA Part 2 practice questions.