Definition of the common size income statement

What is a common size income statement?

An income statement of current size is an income statement in which each item is expressed as a percentage of the value of income or sales. It is used for vertical analysis, in which each item in a financial statement is represented as a percentage of a base figure in the report.

Common-sized financial statements make it possible to analyze and compare the performance of a business over several periods with varying sales figures. Common size percentages can then be compared to those of competitors to determine how well the company is performing relative to the industry.

Key points to remember

  • An income statement of current size is an income statement in which each item is expressed as a percentage of turnover or sales.
  • Common size percentages help show how each line item or component affects the financial condition of the business.
  • Common-sized financial statements make it possible to compare the performance of a company over several periods as well as that of a competitor.

Common size income statement

How the common size income statement is used

Generally accepted accounting principles (GAAP) are based on the consistency and comparability of the financial statements. A common-sized income statement makes it easier to see what drives a company’s profits. Common size percentages also help show how each line item or component affects the financial position of the business. As a result, the user of financial statements can more easily compare financial performance with business peers.

By analyzing how a company’s financial results have changed over time, current-sized financial statements help investors spot trends that a standard financial statement may not reveal. Common size percentages help highlight any consistency in the numbers over time, whether those trends are positive or negative. Significant changes in the percentage of revenue relative to different expense categories over a period of time could be indicative of a change in business model, business performance, or manufacturing costs.

Analysis of common size financial statements can also be applied to the balance sheet and cash flow statement.

Important

Commonly sized income statements with easy-to-read percentages allow for more consistent and comparable financial statement analysis over time and between competitors.

Example of an income statement of common size

The standard figure used in the analysis of an income statement of common size is the total turnover. Common size percentages are calculated to display each line item as a percentage of standard number or revenue.

It is important to note that calculating common size is the same as calculating a company’s margins. Net profit margin is simply net income divided by sales, which turns out to be a common size analysis. The same is true for the calculation of gross margin (revenue minus cost of goods sold divided by revenue) and operating margin (gross profit minus selling and selling expenses). general administration, divided by turnover).

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For example, Company A has an income statement with the above line items: revenue, cost of goods sold (COGS), selling and general administration (S&GA), taxes, and net income. Net income is calculated by subtracting COGS, S&GA expense, and taxes from income. If the income is $ 100,000, the COGS is $ 50,000 and the S&GA is $ 10,000, then the gross profit is $ 50,000, the operating profit is $ 40,000 and the net income is $ 31,600 (less 21% tax).

The common sized version of this income statement divides each item by revenue, or $ 100,000. Income divided by $ 100,000 is 100%. COGS divided by $ 100,000 is 50%, operating income divided by $ 100,000 is 40%, and net income divided by $ 100,000 is 32%. As we can see, the gross margin is 50%, the operating margin is 40% and the net profit margin is 32% – the current size income statement numbers.


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