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Bookkeeping

Common Size Income Statement Definition and Example

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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 common size analysis size income statement figures. Common size, or vertical analysis, is a method of evaluating financial information by expressing each item in a financial statement as a percentage of a base amount for the same time period.

  1. Common-size analysis enables us to compare companies on equal ground, and as this analysis shows, Coca-Cola is outperforming PepsiCo in terms of income statement information.
  2. Coca-Cola’s cost of goods sold is 36.1 percent of net sales compared to 45.9 percent at PepsiCo.
  3. Common size analysis can be conducted in two ways, i.e., vertical analysis and horizontal analysis.
  4. Investors can use the analysis to aid their investment decision and determine their profitability.
  5. As a result, the financial statement user can more easily compare the financial performance to the company’s peers.
  6. Both are useful and paint a 3D picture of a company’s financial performance when used together.

Note that rounding issues sometimes cause subtotals in the percent column to be off by a small amount. We believe everyone should be able to make financial decisions with confidence. Spotting financial patterns can help companies forecast effectively, as the loss period can be more apparent. The goodwill level on a balance sheet also helps indicate the extent to which a company has relied on acquisitions for growth. Make sure to take note of this formatting for when you’re creating your own balance sheets. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Applying Common Size Analysis

A common size balance sheet is set up with the same logic as the common size income statement. The balance sheet equation is assets equals liabilities plus stockholders’ equity. The base amount will change depending on whether the company is completing its analysis on the balance sheet or the income statement. If the company completes its analysis on the balance sheet, then the base amount will be total assets or total liabilities and owners’ (or shareholders’) equity.

Common Size Balance Sheet Statement

In vertical analyses, each line item is expressed as a percentage of the base amount for that period. The research makes it easier to understand the influence of each line item in the financial statement and how it contributes to the final figure. The cash flow statement in terms of total sales indicates that it generated an impressive level of operating cash flow, averaging 26.9% of sales over three years. Share repurchase activity can also be considered a percent of the total top line. Debt issuance is another important figure in proportion to the amount of annual sales it helps to generate.

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However, net income only accounted for 10% of 2022 revenue, whereas net income accounted for more than a quarter of 2021 revenue. The company should look for ways to cut costs and increase sales in order to boost profitability. This common size income statement analysis is done on both a vertical and horizontal basis. A common-size financial statement displays line items as a percentage of one selected or common figure. Creating common-size financial statements makes it easier to analyze a company over time and compare it to its peers.

Common size horizontal analysis

Figure 13.8 “Comparison of Common-Size Gross Margin and Operating Income for ” compares common-size gross margin and operating income for Coca-Cola and PepsiCo. As you can see in Figure 13.5 “Common-Size Income Statement Analysis for “, Coca-Cola’s gross margin as a percent of net sales decreased from 2009 to 2010 (64.2 percent versus 63.9 percent). Common size income statements with easy-to-read percentages allow for more consistent and comparable financial statement analysis over time and between competitors. The balance sheet provides a snapshot overview of the firm’s assets, liabilities, and shareholders’ equity for the reporting period.