Common Size Analysis，also called Vertical Analysis，is the study on the relationship of each item to the total figure in a single statement.In this method，we must define the total figures as the base，and set it equal to 100 percent，then compute the percentage of each item of that figure.In the balance sheet，total assets or total liabilities and stockholders'equity are shown as 100%，and all the other items are expressed as a percentage of the total figures.In the income statement，sales usually are shown as 100%.The computation of each item's percentage is as follows:

Common-size analysis for STE Company is shown in Talbes 11-3 and 11-4.Note in Table 11-3 that the 30.12%cash in 2009 is computed by dividing the $150，000 cash by the$498，000 total assets.In Table 11-4 the 40%cost of goods sold in 2009 is computed by dividing the$400，000 cost of goods sold by the $1，000，000 sales.The other percentages are computed in a similar way.

Table 11-3

From Table 11-3，we can see a shift in the percentage composition of total assets from 2008 to 2009.The percentage of the more liquid current assets has increased，but the percentage of total current assets has decreased.The percentage of stockholders'equity has also decreased.As compared to 2008，the total liabilities have increased because the current liabilities have increased greatly.

Table 11-4

From Table 11-4，we can see that although net income has increased in dollars，it has decreased slightly as a percentage of net income.This is primarily due to that although the percentage of cost of goods sold declined，the percentage of operating expenses increased.So it leads to the percentage of pretax income and net income declined slightly.