What is a common size income statement?
A current size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales. It is used for vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure in the report.
Common size financial statements allow you to analyze and compare the performance of a business over multiple periods with varying sales figures. The common size percentages can then be compared to those of competitors to determine the company’s performance relative to the industry.
Key points to remember
- A current size income statement is an income statement in which each line item is expressed as a percentage of revenue or sales.
- Common size percentages help show how each line item or component affects the company’s financial position.
- Current size financial statements compare the performance of a business over several periods as well as that of a competitor.
Joint 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 size income statement makes it easier to see what generates a business’s profits. Common size percentages also help to show how each line item or component affects the financial condition of the business. As a result, users of financial statements can more easily compare financial performance to that of their peers.
By analyzing the evolution of a company’s financial results over time, current-size financial statements help investors identify trends that a standard financial statement may not discover. Common size percentages help highlight any consistency in the numbers over time, whether these trends are positive or negative. Significant changes in the percentage of revenues compared to different categories of expenses over a given period could be a sign that the business model, sales performance or manufacturing costs are changing.
Analysis of common size financial statements can also be applied to the balance sheet and cash flow statement.
Common size income statements with easy-to-read percentages allow for a more consistent and comparable analysis of financial statements over time and across competitors.
Example of a common size income statement
The standard figure used in the analysis of a common size income statement is total turnover. The common size percentages are calculated to display each line item as a percentage of the standard figure or revenue.
It’s important to note that calculating common size is the same as calculating a company’s margins. The net profit margin is simply net income divided by turnover, which happens to be a common size analysis. The same goes for the calculation of the gross margin (turnover minus the cost of goods sold, divided by turnover), and the operating margin (gross result minus selling and administrative costs, divided by turnover).
For example, company A has an income statement with the above line items: revenue, cost of goods sold (COGS), selling and general administration costs (S&GA), taxes and net profit. Net income is calculated by subtracting COGS, S&GA expenses and income taxes. If revenues are $ 100,000, COGS $ 50,000 and S&GA $ 10,000, then gross profit is $ 50,000, operating profit is $ 40,000 and net profit is $ 31,600 (less taxes at 21 %).
The current size version of this income statement divides each line item by revenue, or $ 100,000. Revenue divided by $ 100,000 is 100%. The COGS divided by $ 100,000 is 50%, the operating profit divided by $ 100,000 is 40% and the net profit 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 figures of the profit and loss account of common size.