how the common size income statement is used
generally accepted accounting principles gaap are based on consistency and comparability of financial statements a common size income statement makes it easier to see what s driving a company s profits the common size percentages also help to show how each line item or component affects the financial position of the company as a result the financial statement user can more easily compare the financial performance to the company s peers by analyzing how a company s financial results have changed over time common size financial statements help investors spot trends that a standard financial statement may not uncover the common size percentages help to highlight any consistency in the numbers over time whether those trends are positive or negative large changes in the percentage of revenue as compared to the various expense categories over a given period could be a sign that the business model sales performance or manufacturing costs are changing common size financial statement analysis can also be applied to the balance sheet and the statement of cash flows common size income statements with easy to read percentages allow for more consistent and comparable financial statement analysis over time and between competitors example of a common size income statementthe standard figure used in the analysis of a common size income statement is total sales revenue the common size percentages are calculated to show each line item as a percentage of the standard figure or revenue 1it s important to note that the common size calculation is the same as calculating a company s margins the net profit margin is simply net income divided by sales revenue which happens to be a common size analysis the same goes for calculating the gross margin sales revenue minus the cost of goods sold divided by sales revenue and operating margin gross profit minus selling general administrative expenses divided by sales revenue for example company a has an income statement with the above line items revenue cost of goods sold cogs selling general administrative expenses s ga taxes and net income net income is calculated by subtracting cogs s ga expenses and taxes from revenue if revenue is 100 000 cogs is 50 000 and s ga is 10 000 then gross profit is 50 000 operating profit is 40 000 and net income is 31 600 taxes at 21 the common size version of this income statement divides each line item by revenue or 100 000 revenue divided by 100 000 is 100 cogs divided by 100 000 is 50 operating profit divided by 100 000 is 40 and net income divided by 100 000 is 32 as we can see gross margin is 50 operating margin is 40 and the net profit margin is 32 the common size income statement figures 