Common-size Income Statement
Common-size income statement is the type of income statements in which each item is reported as a reference to the revenue of the company. This method is executed by converting all the items of the income statements as a reference to percentage of the revenue. This is a method used for the analysis purpose.
It is a general misconception to confuse the common-size income statement as a new type of income statement. However, this is not the case. Common-size income statement is just a tool used for the analysis purpose by the investors, and it is not a reporting format for the income statements. This is also clearly stated in the International Reporting Standards (reference: IAS 1).
By showing the items of the income statement as the percentage of the sales figure, it is easy to compare the income and expenses and understand the financial position of the company. Usually, investors use this method to compare the different size of companies with each other.
In total, three methods are most commonly used for these kinds of comparisons. These are:
- Ratio analysis
- Trend analysis
- Common-size analysis
Although the common-size analysis technique is not as detailed as the ratio analysis, and it does not provide us with comparisons that are more sophisticated, this is a simple method that can easily be carried out with basic analysis techniques. This method is very useful for the people who cannot use the ratio analysis for making comparisons. Since this method of common-size analysis removes the bias from the results, it is a good tool for comparisons.Although this analysis does not provide the detailed basis for the investing decisions, it can help in comparing the financial position of the company with the previous period or with the other companies in the same industry by applying the trend analysis technique. Since this method of common-size analysis provides the results in easy-to-understand using percentages as the reference, it is easy for the investors who have no formal education in the business and cannot apply complex calculations such as ratio analysis for the comparison purposes.