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## Balance Sheet \$type=three\$count=6\$author=hide\$comment=hide\$label=hide\$date=hide\$show=home\$s=0

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.

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Accounting Education: Common Size Income Statement Analysis
Common Size Income Statement Analysis