Question

how do you prepare a common sized income statement?

Answer 1

A normal income statement is prepared by following an equation of "total revenues - total expenses = net income or net loss". A net income arrives when total revenues are more than the total expenses and net loss arrives when total revenues are less than the total expenses.

A common sized income statement is prepared in terms of percentage by taking the sales as base to calculate the percentages for each item in the income statement. For example, sales is shown with its amount and then a total of 100% as base. After that the cost of goods sold amount is dividend by the sales amount in order to get the percentage for cost of goods sold. Like that the percentage is calculated for each item in the income statement.

In order to get the clear idea, the format of a common sized income statement is shown below -

Common Sized Income Statement
Sales	$1,000	100%
Less: Cost of goods sold	($350)	35%
Gross Profit	$650	65%
Less: Selling, general and administrative expenses	($100)	10%
Income before interest and taxes (EBIT)	$550	55%
Less: Interest expense	($50)	5%
Income before taxes (EBT)	$500	50%
Less: Income taxes	($30)	3%
Net Income	$470	47%