Common size income statement is an income statement in which each item is reported as a percentage of revenue (also known as turnover or sales).This technique i.e. to express quantities as a percentage of a base figure is called common-size analysis. This technique i.e. common-size analysis is also known as vertical analysis.
Common size income statements are being used for quite a long time now and are not a new kind of income statement. Its neither a replacement of current income statement format as mentioned under IAS 1. Sometimes students also confuse the word “common size” to mean an minimum elements/items mentioned in IAS 1 which is not the case.
Common size income statements are basically used for analysis purposes where each item on the face of income statement is expressed in relation to revenue so that users can easily understand that how different expenses and other incomes and gains adds up to gross profit and net profit. This is widely used in ratio analysis and serve as a vital tool start up a financial analysis of the key areas of performance and then detailed ratios are applied on each item afterwards.
Although common size income statements do not provide a detailed financial analysis of income statement and its items but it does help in comparing the financial performance of the company with the preceding accounting periods known as trend-analysis or time-series analysis. We can also compare financial information of one company with other companies in the industry which is known as cross-sectional analysis. The good thing about common-size analysis is that it is really easily to do and also interpreting the results is not so difficult. Even the users who are not proficient in analysis techniques can gain insight of company’s financial performance to some extent from common size financial statements i.e. income statement and statement of financial position.
Following is the example of common size income statement with the standard income statement format to easily understand the different between the two and their purpose.