A Common Size Income Statement (also known as a horizontal analysis) is a tool used by businesses and analysts to compare a company’s performance on an absolute basis. Unlike the typical income statement, which shows dollar figures by line item, a common size income statement expresses each item as a percentage of total revenue – usually sales. By comparing common size income statements of different periods for one company, or income statements for different companies, analysts can identify trends and patterns and gain important insights into the business.

A common size income statement shows four major components: revenues, cost of goods sold (COGS), gross profit, operating expenses, and net income. With common size income statements, each item is shown as a percentage of sales. For example, cost of goods sold is divided by sales, operating expenses are divided by sales, etc. This type of analysis allows analysts to view the financial data from a high level, instead of just looking at the raw figures. This helps analysts spot relationships among expenses and revenues, spot outliers or problematic financial areas, and identify trends.

Common size income statements can be used to glean several kinds of insights. One is that individual pieces of the statement may not mean much at the dollar level but be meaningful when compared to the total sales. A cost of goods sold of $50,000 may seem like a large number but when compared to $1 million in total sales, it’s only 5% of the total.

By comparing common size income statements across years or between different companies, analysts can perform valuable exams. They may be able to identify areas of significant growth or contraction, and track how the company is performing compared to its competitors. For example, if a company’s sales have grown by 5%, but costs have grown by 8% during the same period, this could indicate a problem with pricing or the cost structure of the business. Common size income statements are valuable for quickly assessing and evaluating such issues.

Overall, common size income statements are an important financial tool for businesses and analysts. They provide an easy way to view financial data at a high level, identify trends and outliers, and compare the company’s performance over time as well as to competitors. Common size statements are a way for companies to ensure their performance is in line with their goals.