An income statement is one of the big three financial statements a company prepares. This statement lists the sales revenue, cost of goods sold and operational expenses for the business. Traditionally, the information reported consists of the dollar amount for each line item as it appears in the general ledger. This presentation allows stakeholders to determine how well the company did using the capital from its cash account. A common-size income statement transforms these dollar amounts into percentages, with sales revenue being the divisor for all calculations.
Review the current income statement prepared under the traditional method.
Write a new income statement using the same format for the descriptive line items on the current statement. Do not include the dollar amounts for each line.
Mark sales revenue as 100 percent on the new common-size income statement.
Divide each item on the traditional income statement by the total sales revenue from the same statement. For example, $100,000 in sales and $60,000 in cost of goods sold indicates that COGS represents 60 percent of total sales revenue.
Write each percentage for divided line items onto the common-size income statement.
Check your work by adding up each percentage listed beneath sales revenue. The total should come to 100 percent.
Subtotals may be present on a common-size income statement. For example, subtracting the COGS percentage from sales leaves the gross profit percentage. Totaling all operating expenses and deducting this figure from the gross profit percentage results in an operating profit percentage.
- "Intermediate Accounting"; David Spiceland, et al.; 2007