Common Size Income Statement
What Is a Common Size Income Statement?
A common size income statement is an income statement where each detail is communicated as a percentage of the value of revenue or sales. It is utilized for vertical analysis, in which each detail in a financial statement is addressed as a percentage of a base figure inside the statement.
Common size financial statements help to dissect and compare a company's performance north of several periods with changing sales figures. The common size percentages can be in this way compared to those of contenders to decide how the company is performing relative to the industry.
How the Common Size Income Statement Is Used
Generally accepted accounting principles (GAAP) are based on consistency and equivalence of financial statements. A common size income statement makes it simpler to see what's driving a company's profits. The common size percentages additionally help to show what each detail or part means for the financial position of the company. Thus, the financial statement client can all the more effectively compare the financial performance to the company's friends.
By dissecting how a company's financial outcomes have changed over the long run, common size financial statements assist investors with spotting trends that a standard financial statement may not reveal. The common size percentages help to feature any consistency in the numbers over the long haul whether those trends are positive or negative. Large changes in the percentage of revenue as compared to the different expense categories over a given period could be an indication that the business model, sales performance, or it are changing to produce costs.
Common size financial statement analysis can likewise be applied to the balance sheet and the statement of cash flows.
Common size income statements with simple to-peruse percentages take into consideration more reliable and comparable financial statement analysis after some time and between contenders.
Illustration of a Common Size Income Statement
The standard figure utilized in the analysis of a common size income statement is total sales revenue. The common size percentages are calculated to show each detail as a percentage of the standard figure or revenue.
It's important to note that the common size calculation is equivalent to working out a company's margins. The net profit margin is just net income separated by sales revenue, which is a common-size analysis. The equivalent goes for computing the gross margin (sales revenue minus the cost of goods sold, isolated by sales revenue), and operating margin (gross profit minus selling and general administrative expenses, partitioned by sales revenue).
For instance, Company A has an income statement with the above details: revenue, cost of goods sold (COGS), selling and general administrative expenses (S&GA), taxes, and net income. Net income is calculated by taking away COGS, S&GA expenses, and taxes from revenue. On the off chance that revenue is $100,000, COGS is $50,000 and S&GA is $10,000, gross profit is $50,000, operating profit is $40,000, and net income is $31,600 (taxes at 21%).
The common size variant of this income statement partitions each detail by revenue, or $100,000. Revenue partitioned by $100,000 is 100%. COGS partitioned by $100,000 is half, operating profit separated by $100,000 is 40%, and net income partitioned by $100,000 is 32%. As may be obvious, gross margin is half, operating margin is 40%, and the net profit margin is 32%-the common size income statement figures.
- A common size income statement is an income statement by which each detail is communicated as a percentage of revenue or sales.
- Common size financial statements help to compare a company's performance more than several periods as well as against a contender's.
- The common size percentages help to show what each detail or part means for the financial position of the company.