How do you prepare a common size income statement?

How to Prepare a Common Size Income Statement

A common size income statement is a financial statement that expresses each line item as a percentage of a base figure, typically total revenue or sales. This allows for easy comparison and analysis of a company’s financial performance over time or against competitors.

Steps to Prepare a Common Size Income Statement

  1. Determine the base figure

    The base figure is usually total revenue or sales. It is set at 100% and serves as the reference point for calculating the percentages of other line items.

    Key Facts

    1. Determine the base figure: The base figure is usually total revenue or sales. It is set at 100% and serves as the reference point for calculating the percentages of other line items.
    2. Calculate the percentages: Divide each line item by the base figure and multiply by 100 to express it as a percentage. This will show the proportion of each line item relative to the total revenue or sales.
    3. Organize the common size income statement: Create a table or spreadsheet with the line items of the income statement and their corresponding percentages. This will allow for easy comparison and analysis.
    4. Interpret the results: Analyze the common size income statement to understand how each line item contributes to the overall financial position of the company. Compare the percentages over different periods or against competitors to identify trends and performance differences.

    Here is an example of a common size income statement:

    Line Item Amount Percentage
    Revenue $100,000 100%
    Cost of Goods Sold $50,000 50%
    Gross Profit $50,000 50%
    Selling, General, and Administrative Expenses $10,000 10%
    Operating Profit $40,000 40%
    Taxes $10,000 10%
    Net Income $30,000 30%

  2. Calculate the percentages

    Divide each line item by the base figure and multiply by 100 to express it as a percentage. This will show the proportion of each line item relative to the total revenue or sales.

  3. Organize the common size income statement

    Create a table or spreadsheet with the line items of the income statement and their corresponding percentages. This will allow for easy comparison and analysis.

  4. Interpret the results

    Analyze the common size income statement to understand how each line item contributes to the overall financial position of the company. Compare the percentages over different periods or against competitors to identify trends and performance differences.

Example of a Common Size Income Statement

The following table shows an example of a common size income statement:

Line Item Amount Percentage
Revenue $100,000 100%
Cost of Goods Sold $50,000 50%
Gross Profit $50,000 50%
Selling, General, and Administrative Expenses $10,000 10%
Operating Profit $40,000 40%
Taxes $10,000 10%
Net Income $30,000 30%

Sources

FAQs

What is a common size income statement?

A common size income statement is a financial statement that expresses each line item as a percentage of a base figure, typically total revenue or sales.

Why is a common size income statement useful?

A common size income statement is useful for comparing a company’s financial performance over time or against competitors. It allows users to see how each line item contributes to the overall financial position of the company.

How do I prepare a common size income statement?

To prepare a common size income statement, follow these steps:

    1. Determine the base figure (usually total revenue or sales) and set it to 100%.
    1. Divide each line item by the base figure and multiply by 100 to express it as a percentage.
    1. Organize the common size income statement in a table or spreadsheet with the line items and their corresponding percentages.

What are some of the limitations of common size income statements?

Common size income statements can be misleading if the base figure changes significantly over time. They also do not provide information about the absolute величина of the line items, only their relative proportions.

How can I use a common size income statement to analyze a company’s financial performance?

You can use a common size income statement to analyze a company’s financial performance by comparing the percentages of different line items over time or against competitors. This can help you identify trends and performance differences.

What are some of the common mistakes to avoid when preparing a common size income statement?

Some common mistakes to avoid when preparing a common size income statement include:

    • Using a different base figure for different periods or companies, which can make comparisons difficult.
    • Rounding the percentages, which can lead to inaccuracies.
    • Ignoring the absolute величина of the line items, which can be important for understanding the company’s financial position.

What are some of the best practices for preparing a common size income statement?

Some best practices for preparing a common size income statement include:

    • Using a consistent base figure over time and across companies.
    • Rounding the percentages to two decimal places.
    • Including both the percentages and the absolute величина of the line items in the statement.

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