Common Size Income Statement Analysis

Common Size Income Statement 

	A Ltd ( in 000)	A Ltd  (%)	B Ltd ( in 000)	B Ltd ( %)
Sales	500	100	700	100
Less Cost of Sales	325	65	510	72.86
Gross profit	175	35	190	27.16
Operating Expenses
Office Expenses	20	4	25	3.58
selling expenses	30	6	45	6.42
Less Total operating expenses	50	10	70	10
Operating Profit	125	25	120	17.14
Add Miscellaneous Income	20	4	15	2.14
Total Income	145	29	135	19.28
Less Non operating Income
Interest	25	5	30	4.28
Net Profit	120	24	105	15

In above table, we have made common size income statement by taking profit and loss account data of A Ltd and B Ltd. Now we are starting common size income statement analysis on following basis.

1st Base of Analysis : Comparison of Gross Profit 

We will make Pie chart of A Ltd and B Ltd by taking its % sales, % cost of goods sold.

By seeing its pie chart, it is clear that A Ltd has manage better its cost of sales. Due to this, its gross profit is more than B Ltd. B Ltd should adopt the techniques of controlling cost of sales of A Ltd. Cost of sales' main factors are purchase, direct expenses and closing stock. If B Ltd will buy good quality material at minimum cost and try to decrease its direct expenses, its gross profit will surely increase. 

2nd Base of Analysis : Comparison of Operating Expenses

When we compare two companies on the basis of common size income statement, we also check their operating expenses. In operating expenses, we include office and selling expenses. Both companies total operating expenses is 10%. So, we can not take the decision which company has better for saving operating expenses. 

3rd Base of Analysis : Non - Operating Expenses

In non-operating expenses, we include interest expenses, deferred expenses written off. Company B Ltd's non operating expenses are less than company A Ltd. But, we also do not forget that this is just on the basis of sales proportion. We are just estimating that our sales which is our total revenue, is sufficient to pay all operating and non operating expenses. In B Ltd case, it has good because it is less than A Ltd. 

4th Base of Analysis : Net Profit 

Net Profit % of A Ltd and B Ltd will show clear picture of performance of A and B. A Ltd earned 24% net profit and B Ltd earned 15% net profit. From this, we can tell the result that A company's overall profitability is good than B Ltd.

Related : Common Size Balance Sheet Analysis