{"id":3757,"date":"2019-10-08T13:33:00","date_gmt":"2019-10-08T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=3757"},"modified":"2026-02-25T12:36:20","modified_gmt":"2026-02-25T12:36:20","slug":"common-size-income-statements","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/common-size-income-statements\/","title":{"rendered":"Common-size Income Statements"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which ratio indicates that an income statement has been common-sized?\",\n    \"text\": \"The presentation of which of the following ratios would indicate that a company\u2019s income statement has been common-sized?\\n\\nA. Net profit\/Revenue\\n\\nB. Capital\/Total assets\\n\\nC. Net income\/Average assets\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A. A common-sized income statement expresses each line item as a percentage of revenue. Therefore, the ratio of net profit to revenue indicates that the income statement has been common-sized. The other ratios involve balance sheet items or a combination of balance sheet and income statement items.\"\n    }\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/hNscz8Hx_Jg\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Conversion of the income statement to a common-size income statement facilitates an assessment of a company\u2019s performance across time periods (time series analysis), and across companies (cross-sectional analysis).<\/p>\n<p>Common-size analysis of the income statement is performed by stating each line item on the income statement as a percentage of revenue. Benefits of common-sizing the income statement include:<\/p>\n<ul>\n<li>it allows for meaningful comparison between companies with respect to the percentage of expenses and profit relative to sales; and<\/li>\n<li>it highlights any differences that may exist between company strategies. For example, the difference between the ratio of gross profit to sales for two companies may lead to more research being done in order to understand the underlying reasons for the difference and their implications for the future performance of the companies.<\/li>\n<\/ul>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>The presentation of which of the following ratios would indicate that a company\u2019s income statement has been common-sized?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Net profit\/Revenue.<\/li>\n<li data-tadv-p=\"keep\">Capital\/Total assets.<\/li>\n<li data-tadv-p=\"keep\">Net income\/Average assets.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Common-sizing the income statement is performed by stating each line item on the income statement as a percentage of revenue. <a href=\"https:\/\/analystprep.com\/study-notes\/cheap-modvigil\/\">https:\/\/analystprep.com\/<\/a> ambient_generic gmod  The ratio of net profit\/revenue would be derived in this manner.<\/p>\n<p><strong>B is incorrect<\/strong> because the ratio of capital\/total assets is computed using balance sheet items only.<\/p>\n<p><strong>C is incorrect<\/strong> because the ratio of net income\/average assets is computed using both balance sheet and income statement items.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Conversion of the income statement to a common-size income statement facilitates an assessment of a company\u2019s performance across time periods (time series analysis), and across companies (cross-sectional analysis). Common-size analysis of the income statement is performed by stating each line&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-3757","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Common-Size Income Statements | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn how to analyze income statements using common-size analysis by expressing each line item as a percentage of revenue.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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