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.
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
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