What Is a Common Size Income Statement?
Let me explain what a common size income statement is—it's simply an income statement where I express each line item as a percentage of the total revenue or sales. You use this for vertical analysis, representing each item as a percentage of a base figure in the statement.
These common size financial statements let you analyze and compare a company's performance over multiple periods, even when sales figures vary. Once you have those percentages, you can compare them to competitors to see how the company stacks up against the industry.
Key Takeaways
- A common size income statement expresses each line item as a percentage of revenue or sales.
- The percentages show how each line item or component affects the company's financial position.
- Common size statements help compare performance over periods and against competitors.
How the Common Size Income Statement Is Used
You know that generally accepted accounting principles (GAAP) emphasize consistency and comparability in financial statements. A common size income statement makes it straightforward to see what's driving a company's profits. Those percentages highlight how each line item impacts the overall financial position, so you can easily compare performance to peers.
When you analyze how financial results change over time using common size statements, you spot trends that a standard statement might miss. The percentages reveal consistency in the numbers—whether positive or negative. If you see large shifts in expense categories relative to revenue over a period, it could signal changes in the business model, sales performance, or manufacturing costs.
You can apply this common size analysis to the balance sheet and statement of cash flows as well. Remember, common size income statements with their easy-to-read percentages enable more consistent and comparable analysis over time and between competitors.
Example of a Common Size Income Statement
In analyzing a common size income statement, you typically use total sales revenue as the base figure. You calculate the percentages by dividing each line item by that revenue amount.
Note that this calculation is identical to figuring out a company's margins. For instance, net profit margin is net income divided by sales revenue—that's common size analysis. The same applies to gross margin (sales minus cost of goods sold, divided by sales) and operating margin (gross profit minus selling and general administrative expenses, divided by sales).
Take Company A as an example: It has revenue of $100,000, cost of goods sold (COGS) at $50,000, selling and general administrative expenses (S&GA) at $10,000, taxes at 21%, leading to net income of $31,600. Gross profit is $50,000, operating profit is $40,000.
In the common size version, you divide everything by $100,000: Revenue is 100%, COGS is 50%, operating profit is 40%, and net income is 32%. So, you get gross margin at 50%, operating margin at 40%, and net profit margin at 32%—those are your common size figures.
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