## What is a 'Common Size Income Statement'

Common size income statement is an income statement in which each account is expressed as a percentage of the value of sales. This type of financial statement can be used to allow for easy analysis between companies or between time periods of a company. Common size income statement analysis allows an analyst to determine how the various components of the income statement affect a company's profit.

Next Up

## BREAKING DOWN 'Common Size Income Statement'

There are three different financial statements that investors can access: the balance sheet, the cash flow statement and the income statement. The balance sheet provides an overview of assets, liabilities and equity. The cash flow statement provides an overview of the sources and uses of cash. The income statement is perhaps the most popular statement because it provides a summary of company revenues and expenses. The challenge for some analysts and investors is interpreting the income statement. The common size income statement can help with this.

## Common Size Income Statement

The income statement is generally provided as a comparison against previous time periods. It always starts with revenues and sales and ends with net income or earnings per share. In between, investors have a chance to see how much each expense deducts from revenue to arrive at net income. In this way, analysts are able to provide a variance analysis against prior periods. A company with an increase in revenue is doing well but only if it can grow sales at a faster rate than expenses. One tool analysts use to understand how much expenses are changing as a percentage of revenue is by using the common size income statement.

## Example and Usage

Company A has an income statement with four different line items, revenue, cost of goods sold, salaries and net income. Net income is calculated by subtracting the cost of goods sold and salaries from revenue. If revenue is \$100,000, cost of goods sold is \$50,000, and salaries are \$25,000, then net income is \$25,000. The common size version of this income statement is to divide each line item by revenue, or \$100,000. Revenue divided by \$100,000 is 100%. Cost of goods sold divided by \$100,000 is 50%. Salaries divided by \$100,000 is 25%, and net income divided by \$100,000 is also 25%. This tells us that the cost of goods sold takes up 50% of revenues as opposed to 25% of revenues like salaries. Large changes in the percentage of revenue used by different expense categories over a given period of time could be a sign that the business model is changing.

RELATED TERMS
1. ### Income Statement

An income statement is one of the three major financial statements ...
2. ### Financial Statement Analysis

Financial statement analysis is the process of analyzing a company's ...
3. ### Comparative Statement

A statement which compares financial data from different periods ...
4. ### Financial Statements

Records that outline the financial activities of a business, ...
5. ### Bank Statement

A bank statement is a record summarizing all transactions in ...
6. ### Bottom Line

Refers to a company's net earnings, net income or earnings per ...
Related Articles
1. Investing

### Explaining the Common Size Income Statement

A common size income statement expresses each account as a percentage of net sales.
2. Investing

### What are Financial Statements?

Financial statements are a picture of a companyâ€™s financial health for a given period of time at a given point in time. The statements provide a collection of data about a companyâ€™s financial ...
3. Investing

### An Introduction To The Income Statement

The income statement is a measurement of a company's financial performance over a specific period of time. Discover its main components and how they work together.
4. Investing

### How To Analyze Netflix's Income Statements

Learn how to read Netflix's income statement, calculate net income and interpret EPS to evaluate the company's current financial condition.
RELATED FAQS
1. ### Which financial accounting statement contains information on a company's net sales?

Find out which accounting statement contains information on a company's net sales as well as other key statements analysts ... Read Answer >>
2. ### How are cash purchases recorded on a company's income statement?

Take a deeper look at the treatment of cash payments on a company's financial statements, including how specific purchases ... Read Answer >>
3. ### What is the difference between a compiled and a certified financial statement?

All publicly-traded companies are required to provide financial statements, including a balance sheet, cash flow statement ... Read Answer >>
4. ### How do net income and operating cash flow differ?

Net income is the profit a company has earned for a period while cash flow from operating activities measures, in part, the ... Read Answer >>
5. ### How are a company's financial statements connected?

When you do research on different companies by looking at their annual reports, you will typically come across two separate ... Read Answer >>
Hot Definitions
1. ### Working Capital

Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
2. ### Bond

A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
3. ### Compound Annual Growth Rate - CAGR

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
4. ### Net Present Value - NPV

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
5. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
6. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.