Selling and administrative expenses increased from 36.7 percent in 2009 to 37.5 percent in 2010. Since we use net sales as the base on the income
statement, it tells us how every dollar of net sales is spent by
the company. For Synotech, Inc., approximately 51 cents of every
sales dollar is used by cost of goods sold and 49 cents of every
sales dollar is left in gross profit to cover remaining expenses. Of the 49 cents remaining, almost 35 cents is used by operating
expenses (selling, general and administrative), 1 cent by other and
2 cents in interest.

Common-size income statement analysis states every line item on the income statement as a percentage of sales. If you have more than one year of financial data, you can compare income statements to see your financial progress. This type of analysis will let you see how revenues and spending on different types of expenses change from one year to the next. The technique of common size statement analysis is used to interpret three financial statements including balance sheet, income statement and cash flow statement.

Whereas in case of balance sheet, the amount of total assets is taken as the base. Then, each line item in the income statement is expressed as a percentage of total sales. While, each item in the balance sheet is appropriated as a percentage of total assets. Analysts also use vertical analysis
of a single financial statement, such as an income statement.

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  2. Expressing the figures on the income statement and balance sheet as percentages rather than raw dollar figures allows for comparison to other companies regardless of size differences.
  3. This type of financial statement allows for easy analysis between companies, or between periods, for the same company.
  4. This type of analysis will let you see how revenues and spending on different types of expenses change from one year to the next.

However, a simple tool like Microsoft Excel can be quite handy in making the process easier and faster. The same formula can be copied and replicated in each income statement line, making the calculations much faster. In Figure 5.21, you can see the formulas used to create Clear Lake Sporting Goods’ common-size income statement in Excel. Notice that the $ can be inserted to anchor a cell reference, making it easier to copy and paste the same formula onto many lines or columns. When comparing any two common size ratios, it is important to make sure that they are computed by using the same base figure.

IBM’s 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 the three-year period. This development, fundraising, and marketing for IBM shows an R&D expense that averages close to 1.5% of revenues in 2020 and 2021. The common size method is appealing for research-intensive companies because they tend to focus on research and development (R&D) and what it represents as a percent of total sales. This common-size balance sheet for technology giant International Business Machines (IBM) is a good example. You can see that long-term debt averages around 34% of total assets over the two-year period, which is reasonable. Cash ranges between 5% and 8.5% of total assets and short-term debt accounts for about 5% of total assets over the two years.

Analyzing Organizational Performance

Trendy Trainers has also prepared a common-size income statement for the same year. But you can perform this analysis on your entire income statement, too. Doing so will help you see at a glance which expenses take up the largest percentage of your revenue. A common-size balance sheet is a comparative analysis of a company's performance over a period.

Common size balance sheet example

The cash flow statement is divided among cash flows from operations, cash flows from investing, and cash flows from financing. Each section provides additional information about the sources and uses of cash in each business activity. And how can such statements help in financial data analysis and interpretation. Different stakeholders including managers, investors, owners and creditors want to analyze and interpret the financial statements. Each of the stakeholders evaluate the statements with a different purpose altogether.

Find out how GoCardless can help you with ad hoc payments or recurring payments. Share repurchase activity as a percentage of total sales in each of the three years was minimal or non-existent, possibly due to economic and market conditions resulting from the COVID-19 pandemic. All three of the primary financial statements can be put into a common-size format. Financial statements in dollar amounts can easily be converted to common-size statements using a spreadsheet. Here is a hypothetical example of how some line items might look on a common-size income statement for three successive years.

The most significant benefit of a common size analysis is that it can let you identify large or drastic changes in a firm’s financials. Rapid increases or decreases will be readily observable, such as a fast drop in reported profits during one quarter or year. The key benefit of a common size analysis is that it allows for a vertical analysis by line item over a single period, such as quarterly or annually. It also allows you to view a horizontal perspective over a period such as the three years that were analyzed for IBM. It's important to add short-term and long-term debt together and compare this amount to the total cash on hand in the current assets section. This lets you know how much of a cash cushion is available or if a firm is dependent on the markets to refinance debt when it comes due.

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When you show the items on the income statement as a percentage of the sales figure, it makes it easier to compare the income and expenses and understand the financial position of the company. Common size analysis is an excellent tool to compare companies of different sizes or to compare different years of data for the same company, as in the example below. The common size version of this income statement divides each line item by revenue, or $100,000.

Common Size Income Statement

Based on the accounting equation, this also equals total liabilities and shareholders’ equity, making either term interchangeable in the analysis. It's also possible to use total liabilities to indicate where a company’s obligations lie and whether it's being conservative or risky in managing its debts. 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. Using common-size financial statements helps spot trends that a raw financial statement may not uncover.

It could be that at least a part of it was due to factors beyond its control. For example, weather conditions might have reduced the production of a raw material it needs and hence increased the price. At first glance, the cost of goods sold may not look like a serious concern. There is only a 10% difference between what Sporty Shoes is paying and what Trendy Trainers is paying. The problem is that the cost of goods sold is a significant expense for both companies.

The common size strategy from a balance sheet perspective lends insight into a firm’s capital structure and how it compares to its rivals. You can also look to determine an optimal capital structure for a given industry and compare it to the firm being analyzed. You can then conclude whether the debt level is too high, excess cash is being retained on the balance sheet, or inventories are growing too high. Here are some advantages and disadvantages of using common-size income statements. To find the value of any line item from the income statement for a common-size income statement you divide that line item by the total revenue.

Rather, it showcases the trends of the relationship of each of the items to the total. Notice that PepsiCo has the highest net sales at $57,838,000,000 versus Coca-Cola at $35,119,000,000. Once converted to common-size percentages, however, we see that Coca-Cola outperforms PepsiCo in virtually every income statement category. Coca-Cola’s cost of goods sold is 36.1 percent of net sales compared to 45.9 percent at PepsiCo. Coca-Cola’s gross margin is 63.9 percent of net sales compared to 54.1 percent at PepsiCo. Coca-Cola’s operating income is 24.1 percent of sales compared to 14.4 percent at PepsiCo.

And it is worth noting that profits rise in conjunction, though not as fast as revenue. This is not uncommon as businesses often tend to sacrifice profit for the sake of growth. Note that although we have compared just two https://simple-accounting.org/ years of data for Charlie and Clear Lake, it is more common to use several years of data to get a more robust view of long-term trends. We believe everyone should be able to make financial decisions with confidence.