A common-size income statement standardizes financial statement components by showing them as a percentage of sales. This version of an income statement is useful for presenting data in an accessible format for comparison, according to Accounting Coach.Continue Reading
The format of a common-size income statement helps to mitigate the impact of accounting practices applied differently across companies. By normalizing income statement items in this manner, analysts make easier comparisons, particularly when viewing companies of different sizes. This technique is also known as vertical analysis, explains Accounting For Management. Because differences in firm size may make data interpretation more difficult, the common-size format supports trend analysis and cross-sectional analysis. In other words, the common-size income statement makes it easier to evaluate information from one period to the next within a company, as well as evaluate a company relative to its competitors.
Common-size income statement ratios are especially useful in studying trends in costs and profit margins, serving as an important foundation for financial analysis in the key areas of performance. The format allows for quick viewing of certain financial ratios such as gross profit margin, operating profit margin and net profit margin, notes Accounting for Management. As with the income statement, changes in balance sheet and cash flow statement components can also be analyzed over time with similar common-size approaches. For example, balance sheet elements can be shown as a percentage of total assets. The insights gained from the analysis of common-size statements can help support a detailed analysis of the firm and its industry.Learn more about Accounting