Common Size Income Statement

A common size income statement is a financial statement that expresses all items in the income statement as a percentage of sales. This makes it easier to compare the profitability of a company over time and to compare it to other companies in the same industry.

To create a common size income statement, you start by adding up all of the revenue from all sources. This is your total sales. Then, you divide each item in the income statement by total sales. For example, if your cost of goods sold is $100 and your total sales are $1,000, then your cost of goods sold as a percentage of sales is 10%.

Here is an example of a common size income statement:

| Revenue | Cost of Goods Sold | Gross Profit | Operating Expenses | Net Income |
|---|---|---|---|---|
| 100% | 50% | 50% | 25% | 25% |

This income statement shows that the company's cost of goods sold is 50% of sales, its gross profit is 50% of sales, its operating expenses are 25% of sales, and its net income is 25% of sales.

There are a few advantages to using a common size income statement. First, it makes it easier to compare the profitability of a company over time. For example, if a company's cost of goods sold as a percentage of sales increases from 50% to 60%, this means that the company is becoming less profitable. Second, it makes it easier to compare the profitability of a company to other companies in the same industry. For example, if a company's net income as a percentage of sales is 10%, and the average net income as a percentage of sales for companies in the same industry is 15%, this means that the company is less profitable than average.

However, there are also a few disadvantages to using a common size income statement. First, it can be difficult to interpret if you are not familiar with the industry. For example, a company with a high cost of goods sold as a percentage of sales may still be profitable if it has a high gross margin. Second, a common size income statement does not take into account the size of the company. For example, a small company with a high net income as a percentage of sales may not be as profitable as a large company with a lower net income as a percentage of sales.

Overall, a common size income statement can be a useful tool for comparing the profitability of a company over time and to other companies in the same industry. However, it is important to be aware of its limitations before using it.