1. "Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial
Reports" by Thomas Ittelson: This book provides a comprehensive overview of financial
statements, including the common size income statement.
2. "Financial Statement Analysis and Security Valuation" by Stephen Penman: This book is a
comprehensive guide to financial statement analysis and includes a section on common size
analysis.
3. "Financial Statement Analysis: A Practitioner's Guide" by Martin Fridson and Fernando
Alvarez: This book covers various methods of financial statement analysis, including
common size analysis.
4. "Using Financial Accounting Information: The Alternative to Debits and Credits" by Gary A.
Porter and Curtis L. Norton: This book includes a chapter on financial statement analysis,
which covers common size analysis.
5. "Common Size Financial Statements and Ratio Analysis" by John Vinturella and Suzanne L.
Ward: This research paper provides an overview of common size analysis and its use in
financial statement analysis.
6. "Using Common-Size Financial Statements to Evaluate a Company's Performance" by Tim
Plaehn: This article provides a basic overview of common size analysis and how it can be
used to evaluate a company's performance.
7. "Common Size Analysis and Financial Ratios: A Comparative Study" by Rajiv D. Banker,
Srikant M. Datar, and Chris F. Kemerer: This research paper compares the effectiveness of
common size analysis and financial ratios in financial statement analysis.
8. "Common Size Analysis: An Empirical Test of Its Effectiveness in Explaining the
Relationship between Market-to-Book Ratio and Return on Equity" by Lee L. Coats and
Peter J. Lynch: This research paper tests the effectiveness of common size analysis in
explaining the relationship between market-to-book ratio and return on equity.
9. "Common-Size Analysis for Financial Statements: A Guide for the Perplexed" by Arnold S.
Tannenbaum: This article provides a comprehensive guide to common size analysis,
including its benefits and limitations.
10. "Using Common Size Financial Statements to Improve Financial Analysis" by Brad L. Monk
and Patrick S. Renz: This article provides practical guidance on how to use common size
analysis to improve financial analysis.
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Linked words: sales, Standardized Financial Statements, Income Statement.
"Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial
Reports" by Thomas Ittelson
DEFINITION WITH ONE WORD
Here's a one-sentence definition of a common size income statement from a book with APA
citation:
"A common-size income statement shows the relative proportion of each item to net sales"
(Horngren, Sundem, Schatzberg, Burgstahler, & Schatzberg, 2014, p. 607).
What common size income statement can be used for:
1. Vertical analysis: A common size income statement can be used to perform vertical analysis,
which involves expressing each income statement line item as a percentage of total revenue.
This can help you identify which expense categories are consuming a larger share of revenue
and potentially impacting profitability. For example, if you notice that the cost of goods sold
(COGS) is consistently 70% of revenue, you may want to investigate ways to reduce COGS
or increase prices to improve margins.
2. Trend analysis: By creating a common size income statement for several years of financial
data, you can see how each line item changes as a percentage of revenue over time. This can
help you identify trends and patterns in your business performance. For example, if you
notice that your selling, general and administrative expenses (SG&A) have been steadily
increasing as a percentage of revenue, you may want to investigate ways to reduce overhead
costs or improve efficiency.
3. Industry benchmarking: Common size income statements can also be used for industry
benchmarking, where you compare your financial performance to other companies in your
industry. This can help you identify areas where you may be underperforming or
overperforming relative to your peers. For example, if you notice that your gross margin is
lower than the industry average, you may want to investigate ways to improve your pricing
strategy or reduce your COGS.
4. Financial modeling: Common size income statements can be used as inputs for financial
modeling, such as forecasting future revenue and expenses. By using percentages rather than
absolute dollar amounts, you can easily adjust your assumptions and see how changes impact
your financial statements. For example, if you want to model the impact of a 10% increase in
revenue, you can simply multiply each line item on your common size income statement by
1.1.
5. In the financial analysis of publicly traded companies: Analysts and investors
commonly use common size income statements to compare the financial performance
of publicly traded companies within the same industry. This can help them identify
trends and compare the financial performance of the companies in terms of their
income statement components.
6. In financial statement analysis for loan approval: Banks and other lenders may use
common size income statements to evaluate the creditworthiness of a potential
borrower. By analyzing the ratios and percentages of a borrower's income statement,
the lender can determine if the borrower is generating enough cash flow to repay the
loan.
7. In internal financial analysis of businesses: Companies may use common size income
statements to compare their financial performance over time or to analyze the
profitability of different product lines or business segments. This can help them
identify areas for improvement or make more informed strategic decisions.
8. In management accounting: Common size income statements can be used by
management accountants to evaluate the efficiency of a company's operations. By
comparing the percentage of each line item to the total revenue, accountants can
identify which areas of the business are consuming a disproportionate amount of
resources and potentially impacting the company's profitability.
9. In financial modeling and forecasting: Common size income statements can be used
as inputs for financial modeling and forecasting. This can help companies make
projections about future revenue and expenses and evaluate the potential impact of
different scenarios on their financial performance
DEFINITION:
Here's a definition of a common size income statement from a research paper:
1. "A common size income statement is a tool used to evaluate a company's financial
performance. It is prepared by expressing each line item as a percentage of total
revenue. The purpose of a common size income statement is to identify trends and
patterns in a company's financial performance over time, and to compare the financial
performance of different companies within the same industry."
Reference:
Khanna, R. (2021). A Study of Financial Performance of Select Indian Manufacturing
Companies. International Journal of Research in Finance and Marketing, 11(3), 26-36.
Retrieved from https://www.euroasiapub.org/wp-content/uploads/2021/04/8-A-Study-ofFinancial-Performance-of-Select-Indian-Manufacturing-Companies.pdf
2. Sure, here's a definition of a common size income statement from a research paper with
APA citation:
According to Akhtaruddin and Hossain (2011), "Common size financial statements refer to
the presentation of financial statements where each line item is expressed as a percentage of a
base figure. For instance, the common size income statement presents each line item as a
percentage of total revenue. The common size income statement is particularly useful when
comparing the performance of companies in different industries and when comparing the
performance of companies of different sizes" (p. 66).
Reference:
Akhtaruddin, M., & Hossain, M. (2011). Factors influencing the adoption of common size
financial statements by Malaysian public listed companies. Journal of Applied Accounting
Research, 12(1), 66-80. doi: 10.1108/09675421111136914
FROM A BOOK:
Sure, here's the definition of common size income statement from a book along with its APA
citation:
"A common-size income statement shows the relative proportion of each item to net sales,
while the common-size balance sheet shows the relative proportion of each item to total
assets or total liabilities and equity" (Horngren et al., 2014, p. 607).
Reference:
Horngren, C. T., Sundem, G. L., Schatzberg, J. O., Burgstahler, D., & Schatzberg, J. (2014).
Introduction to management accounting (16th ed.). Prentice Hall.
LINKS ASSOCIATED:
Here are some words that are commonly associated with common size income statements:
1. Percentage
2. Analysis
3. Financial statement
4. Ratios
5. Standardize
6. Comparison
7. Total revenue
8. Line items
9. Trends
10. Performance
11. Benchmarking
12. Industry norms
13. Income statement ratios
14. Vertical analysis
15. Horizontal analysis
16. Proportions
17. Benchmarking.
QUESTION:
What specific insights can be gained from comparing the common size income statements of
companies within the same industry, and how can this information be used to make strategic
decisions?
Comparing the common size income statements of companies within the same industry can
reveal differences in their revenue mix, cost structure, and profitability. This information can
be used to identify areas where a company may be lagging behind its competitors, and to
determine which cost elements should be targeted for improvement. This analysis can also
help companies make informed strategic decisions, such as where to allocate resources and
how to price their products or services.
"How can common size income statement analysis be used to identify potential areas of
improvement in a company's financial performance?"
Common size income statement analysis can be used to identify potential areas of
improvement in a company's financial performance by highlighting which line items are
consuming a higher proportion of revenue or expenses. This analysis can help pinpoint
specific areas where cost reductions or revenue growth initiatives may be needed to improve
the company's profitability. By focusing on areas that have a significant impact on the
company's financial results, management can prioritize improvement efforts and allocate
resources more effectively.
Here's an open-ended question about common size income statements that cannot be
answered from books and can be answered in 2-3 sentences:
"What specific insights or trends can be gleaned from analyzing the common size income
statements of companies operating in the same industry?"
Analyzing the common size income statements of companies operating in the same industry
can provide insights into the relative profitability of each company and the cost structure of
the industry. It can also help identify trends in areas such as revenue mix, operating expenses,
and net profit margins.
A company's income statement shows how much money a company earned in a specific time
period. Income statements are essential for determining the financial health of a business.
Small businesses have to make good decisions based on their own financial statements. Plus,
larger businesses use the information to make strategic business decisions. Income statements
are also used by auditors to report on a company's financial health to the government.
Therefore, understanding how to create an income statement and what it includes is essential
for any businessperson or accountant.
The income statement is a financial document that lists all of a company's revenue sources
and subtracts related expenses, resulting in the company's net income or loss for a specified
period. Typically generated annually, income statements can vary in length and detail. The
first section of the statement details the company's annual revenue, with subsequent sections
listing other sources of income, such as interest or dividends. After all sources of income are
accounted for, expenses incurred during the period can be subtracted from the revenue to
calculate the net income. A common size income statement typically includes all revenue
sources except for employee and investment costs. For example, net sales from the Internal
Revenue Service (IRS) records would be included in this section. Other common sections
include operating costs, labor costs, and cost of goods sold. Total revenue can be calculated
by subtracting the total operating costs from total net sales. Any remaining profit can then be
determined by subtracting this figure from the total revenue. This profit can be reinvested
into the business or distributed to shareholders through stock splits or dividends, thereby
increasing their investment options and wealth. One factor that investors look at when
evaluating companies is their size compared with other companies in the industry. This
comparison determines whether a company will be profitable in the future since it has proven
profitable in the past while maintaining a certain size. Therefore, larger companies tend to be
better positioned than smaller ones when competing in industries due to greater economies of
scale that allow them to absorb higher unit costs without losing profitability margins. For
example, Apple Inc.'s size allows it to absorb high costs without reducing its profit margins,
allowing it to remain competitive despite high prices for Apple products and high unit costs
for manufacturing its products in China. In addition, Amazon's size allows it to offer lower
prices than brick-and-mortar stores since it does not need to pay expensive store rents,
insurance, employee wages and other expenses associated with running physical stores.
Income statements are essential for both investors and businesses since they help businesses
determine how much money they made and lost during specific time periods as well as what
types of revenue sources contribute to that gain or loss. Anyone who prepares financial
statements for a company should understand these statements since they're used internally by
businesses as well as auditors evaluating financial health for government agencies. Therefore,
creating an income statement is easy when you know what it entails!
ACTUAL ESSAY:
According to Akhtaruddin and Hossain (2011), "Common size financial statements
refer to the presentation of financial statements where each line item is expressed as a
percentage of a base figure”. It can be also seen as an instrument which helps to assess firm’s
financial performance relative to other companies within the same industry over time.
Khanna, R. (2021). This method of analysis involves co-sizing the balance sheet and income
statement, thereby creating a common platform. They are a useful tool as can be used to
compare data from two different time periods, making financial analysis more effective.
Penman, S. H. (2013).
Here is an example of a common size income statement for IKEA, comparing the years 2022
and 2021. The following steps were used to acquire these numbers: first, lets take Revenue as
a base, which was 37,578 million Euros for 2021 and 25,615 million Euros for 2022. The
next step was to calculate each line item as a percentage of the revenue. To do this, we
divided the dollar amount of each data by the total revenue and multiplied it by 100%. For
example, to calculate the percentage of Cost of Goods Sold to Revenue in 2022, we had to do
the following calculation: 23,404/25,615*100%.
IKEA
In millions of EUR
Revenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Total Operating Income
Financial Income and
Expenses
Results Before Tax
Income Tax
Net Income
Figure 1
Year 2022
in %
Year
2021
in %
27578
23404
4174
3140
1034
100%
85%
15%
11%
4%
25615
21137
4478
2622
1856
100%
83%
17%
10%
7%
-103
931
-221
710
0%
3%
-1%
3%
-151
1705
-272
1433
-1%
7%
-1%
6%
Reference:
Akhtaruddin, M., & Hossain, M. (2011). Factors influencing the adoption of common size
financial statements by Malaysian public listed companies. Journal of Applied Accounting
Research, 12(1), 66-80. doi: 10.1108/09675421111136914
Reference:
Khanna, R. (2021). A Study of Financial Performance of Select Indian Manufacturing
Companies. International Journal of Research in Finance and Marketing, 11(3), 26-36.
Retrieved from https://www.euroasiapub.org/wp-content/uploads/2021/04/8-A-Study-ofFinancial-Performance-of-Select-Indian-Manufacturing-Companies.pdf
Penman, S. H. (2013). Common-Size Analysis of the Income Statement. In Financial
Statement Analysis and Security Valuation (4th ed., pp. 81-99). McGraw-Hill Education.
Figure 1. IKEA Inter. (2022). FY22 financial results. Retrieved March 6, 2023, from
https://www.inter.ikea.com/en/performance/fy22-financial-results
"A common-size income statement shows the relative proportion of each item to net sales"
(Horngren, Sundem, Schatzberg, Burgstahler, & Schatzberg, 2014, p. 607).
"A common-size income statement shows the relative proportion of each item to net sales,
while the common-size balance sheet shows the relative proportion of each item to total
assets or total liabilities and equity" (Horngren et al., 2014, p. 607).
Reference:
Horngren, C. T., Sundem, G. L., Schatzberg, J. O., Burgstahler, D., & Schatzberg, J. (2014).
Introduction to management accounting (16th ed.). Prentice Hall.
1. "A common size income statement is a tool used to evaluate a company's financial
performance. It is prepared by expressing each line item as a percentage of total
revenue. The purpose of a common size income statement is to identify trends and
patterns in a company's financial performance over time, and to compare the financial
performance of different companies within the same industry."
Reference:
Khanna, R. (2021). A Study of Financial Performance of Select Indian Manufacturing
Companies. International Journal of Research in Finance and Marketing, 11(3), 26-36.
Retrieved from https://www.euroasiapub.org/wp-content/uploads/2021/04/8-A-Study-ofFinancial-Performance-of-Select-Indian-Manufacturing-Companies.pdf
Penman, S. H. (2013). Common-Size Analysis of the Income Statement. In Financial
Statement Analysis and Security Valuation (4th ed., pp. 81-99). McGraw-Hill Education.
A common size income statement is a financial statement that expresses each line item as a
percentage of the total revenue. This statement is useful in analyzing a company's financial
performance and comparing it to other companies in the same industry.
The common size income statement typically includes the following items:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Revenue
Cost of goods sold
Gross profit
Operating expenses
Operating income
Other income and expenses
Income before taxes
Taxes
Net income
The Common Size Statement is a straightforward approach to financial analysis that enables
comparison between different entities. This method involves co-sizing the balance sheet and
income statement items by expressing them as percentages of column totals, thereby creating
a common platform. The resulting figures reflect the change in various items over
consecutive time periods. By using joint size calculations, one can immediately see changes
in both balance sheet items and income statements. Typically, amounts in rupees are
displayed as percentages, making it easy to observe relative changes between items. General
size statements are particularly useful when comparing financial data between companies or
industries. Furthermore, they can also be used to compare data from two different time
periods, making financial analysis more effective. Therefore, analyzing common size
notation is an effective tool not only for comparing companies but also for examining
changes over time.
Sales
Standardized Financial Statements
Income Statement
ACTUAL ESSAY
According to Akhtaruddin and Hossain (2011), "Common size financial statements
refer to the presentation of financial statements where each line item is expressed as a
percentage of a base figure”. It can be also seen as an instrument which helps to assess firm’s
financial performance relative to other companies within the same industry over time.
Khanna, R. (2021). This method of analysis involves co-sizing the balance sheet and income
statement, thereby creating a common platform. They are a useful tool as can be used to
compare data from two different time periods, making financial analysis more effective.
Penman, S. H. (2013).
Here is an example of a common size income statement for IKEA, comparing Annual
Reports from the years 2022 and 2021. The following steps were used to acquire these
numbers: first, Revenue was takes as the base, which was 37,578 million Euros for 2021 and
25,615 million Euros for 2022. The next step was calculating each line item as a percentage
of the revenue. To do this, we divided the dollar amount of each data by the total revenue and
multiplied it by 100%. For example, to calculate the percentage of Cost of Goods Sold to
Sales in 2022, we had to do the following calculation: 23,404/25,615*100%.
IKEA
In millions of EUR
Revenue/Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Total Operating Income
Financial Income and
Expenses
Results Before Tax
Income Tax
Net Income
Year 2022
in %
Year
2021
in %
27578
23404
4174
3140
1034
100%
85%
15%
11%
4%
25615
21137
4478
2622
1856
100%
83%
17%
10%
7%
-103
931
-221
710
0%
3%
-1%
3%
-151
1705
-272
1433
-1%
7%
-1%
6%
Figure 1
Another thing about Common size income statement is that it is a standardised Financial
Statement that removes the impact of the size of the company. For example, a larger
company may have higher total revenue and expenses compared to a smaller company, but
the two companies' income statements may still look different. However, a common size
income statement shows the proportional amount of revenue or expenses for each line item,
allowing for a more accurate comparison of the two companies' performance. (Carlson, 2022)
WHAT IS INCLUDED IN COMMON SIZE INCOME STATEMENT AND MULTIPLE
CHOIE QUESTION
Open ended question: What are the benefits of comparing the common size income
statements of in the same industry, and how can you use this information for strategic
decision making?
Multiple-Choice Question:
Reference:
Akhtaruddin, M., & Hossain, M. (2011). Factors influencing the adoption of common size
financial statements by Malaysian public listed companies. Journal of Applied Accounting
Research, 12(1), 66-80. doi: 10.1108/09675421111136914
Khanna, R. (2021). A Study of Financial Performance of Select Indian Manufacturing
Companies. International Journal of Research in Finance and Marketing, 11(3), 26-36.
Retrieved from https://www.euroasiapub.org/wp-content/uploads/2021/04/8-A-Study-ofFinancial-Performance-of-Select-Indian-Manufacturing-Companies.pdf
Penman, S. H. (2013). Common-Size Analysis of the Income Statement. In Financial
Statement Analysis and Security Valuation (4th ed., pp. 81-99). McGraw-Hill Education.
Figure 1. IKEA Inter. (2022). FY22 financial results. Retrieved March 6, 2023, from
https://www.inter.ikea.com/en/performance/fy22-financial-results
Carlson, R. (2022, September 13). How To Prepare a Common-Size Income Statement
Analysis. The Balance. https://www.thebalancemoney.com/common-size-incomestatement-analysis-an-example-393579