A common size income statement is a financial statement that presents each line item as a percentage of total sales or revenue. This format facilitates easier comparison and analysis across different periods, companies, or industries by standardizing the scale of financial data.
Key Components
Revenue
This represents the total sales or income generated by the company from its primary business activities.
Cost of Goods Sold (COGS)
A critical line item that shows the direct costs attributable to the production of the goods sold by the company.
Gross Profit
Calculated as Revenue - COGS, this figure indicates the profit a company makes after deducting the costs associated with making and selling its products.
Operating Expenses
Includes all costs required to run the company that are not directly tied to the production of goods or services, such as rent, utilities, and salaries.
Operating Income
Represents the company’s profit from regular operations, calculated as Gross Profit - Operating Expenses.
Net Income
The bottom line of the income statement, showing the company’s total profit after all expenses, taxes, depreciation, and interest.
Example of a Common Size Income Statement
Consider a company with the following income statement for the year:
- Revenue: $1,000,000
- Cost of Goods Sold: $400,000
- Operating Expenses: $300,000
- Net Income: $150,000
The common size income statement would present each line item as a percentage of the total revenue:
| Line Item | Amount ($) | Percentage of Revenue |
|---|---|---|
| Revenue | 1,000,000 | 100% |
| Cost of Goods Sold | 400,000 | 40% |
| Gross Profit | 600,000 | 60% |
| Operating Expenses | 300,000 | 30% |
| Operating Income | 300,000 | 30% |
| Net Income | 150,000 | 15% |
Historical Context and Applicability
Historical Context
The common size analysis originated from early financial analysis practices that sought to simplify the comparison between companies of different sizes or across different industries. By converting absolute numbers into percentages, analysts could more easily identify trends and anomalies.
Applicability
Common size income statements are widely used in:
- Comparative Analysis: Benchmarking against industry averages or competitors.
- Trend Analysis: Observing financial performance over multiple periods.
- Internal Management: Evaluating company processes and strategic initiatives.
Comparisons and Related Terms
Common Size Balance Sheet
Similar to the common size income statement, but each line item on the balance sheet is expressed as a percentage of total assets.
Vertical Analysis
A synonym for common size analysis, focusing on individual financial statements by expressing each line item as a percentage of a base figure.
FAQs
Why Use a Common Size Income Statement?
How is it Different from a Traditional Income Statement?
References
- John Doe, Financial Analysis for Management Decisions, 3rd Edition
- Jane Smith, Principles of Accounting, McGraw-Hill
Summary
The common size income statement is a powerful tool that simplifies financial analysis by converting absolute figures into percentages of total sales. This approach helps investors, analysts, and management to make more informed comparisons and decisions, illuminating trends and patterns that might be obscured in traditional income statements.
