The Common Size Income Statement
Chapter Twenty
Syllabus topic 4, "Common Size Financial Statements – Preparation and analysis of Common Size Income Statement and Common Size Balance Sheet, conversion of financial statement items into percentages, and interpretation of financial structure and profitability."
Pages 51 to 53 of 162
In one line
A common size income statement expresses every item as a percentage of net sales, so that the structure of the business appears and its size disappears.
The formula
Common size percentage = (the item / net sales) x 100
Net sales is therefore 100.00 in every column, and every other figure is read as "paise in the rupee of sales".
The statement
Sunrise Industries Ltd Common size income statement for the years ended 31 March 2026 and 2027
| Particulars | 2026, Rs | 2026, per cent | 2027, Rs | 2027, per cent |
|---|---|---|---|---|
| Net sales | 16,00,000 | 100.00 | 20,00,000 | 100.00 |
| Less: cost of goods sold | 11,20,000 | 70.00 | 14,00,000 | 70.00 |
| Gross profit | 4,80,000 | 30.00 | 6,00,000 | 30.00 |
| Less: administrative expenses | 90,000 | 5.62 | 1,00,000 | 5.00 |
| Less: selling and distribution expenses | 1,10,000 | 6.88 | 1,40,000 | 7.00 |
| Total operating expenses | 2,00,000 | 12.50 | 2,40,000 | 12.00 |
| Operating profit | 2,80,000 | 17.50 | 3,60,000 | 18.00 |
| Add: non-operating income | 30,000 | 1.88 | 40,000 | 2.00 |
| Less: non-operating expenses | 10,000 | 0.62 | 20,000 | 1.00 |
| Profit before interest and tax | 3,00,000 | 18.75 | 3,80,000 | 19.00 |
| Less: interest | 40,000 | 2.50 | 40,000 | 2.00 |
| Profit before tax | 2,60,000 | 16.25 | 3,40,000 | 17.00 |
| Less: provision for tax | 78,000 | 4.88 | 1,02,000 | 5.10 |
| Profit after tax | 1,82,000 | 11.38 | 2,38,000 | 11.90 |
Specimen working.
| Administrative expenses, 2026 | 90,000 over 16,00,000 times 100 = 5.62 |
| Operating profit, 2027 | 3,60,000 over 20,00,000 times 100 = 18.00 |
The interpretation
Read the percentage columns against each other and ignore the rupees.
The gross margin is unchanged at 30 per cent. Cost of goods sold is exactly 70 paise in every rupee of sales in both years. The company neither gained nor lost on its buying and its pricing, and everything that changed happened below the gross profit line.
Operating expenses fell from 12.50 to 12.00 paise in the rupee. That is where the improvement is. Administrative expenses fell from 5.62 to 5.00, which is what a largely fixed cost does when sales grow: the same rupees spread over more sales. Selling and distribution rose from 6.88 to 7.00, which is the one movement in the wrong direction, and it is small.
Operating profit therefore rose from 17.50 to 18.00 paise in the rupee, and the whole of the half-paisa came from administration.
Interest fell from 2.50 to 2.00 paise without the interest bill changing at all, because the same Rs 40,000 is now spread over sales a quarter larger. A common size statement shows the burden of a fixed charge falling as a business grows, and that is one of the things only this statement shows.
Profit after tax rose from 11.38 to 11.90 paise in the rupee. The company keeps half a paisa more out of every rupee it sells than it did.
In one sentence: the trading margin is unchanged and the whole improvement in profitability comes from spreading fixed administrative costs and a fixed interest charge over a larger volume.
The rest of this chapter
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