Question

What would cause changes in income taxes and interest expoense on a common sized income statement?

Answer 1

As we know that common size income statement is prepared in percentage format. Each item of income statement is calculated in percentage form with reference to sales revenue.

Now come to main point;

Income taxes expense is shown as expense in income statement and also in common size income statement. So income taxes expense will be affected by the total amount of sales revenue and total amount of income tax expenses. Apart firm this total amount of other expenses and amount of net income will also affect income taxes expense in the common size income statement. As we know that income taxes expense will be calculated on the basis of following formula;

(Income taxes expense / Sales) * 100.

Thus percentage of income tax expense will be affected by total value of sales amount and by the amount of income taxes expense.

Amount of total expenses will also affect position of income taxes expense in the common size income statement because income taxes will be calculated on net income and net income is calculated with the help of total expenses. Thus income taxes expense is affected by the net profit and total expenses in the common size income statement.

Interest expense in the common size income statement is affected by amount of sales and amount of interest expense because position of interest expense is calculated with the help of sales amount and interest expense because formula is as follow;

(Interest expesne / Sales) * 100

Apart from this interest expense is also affected by the position of fixed interest bearing liabilities because interest is paid on these liabilities.