{"id":46892,"date":"2023-09-26T10:31:51","date_gmt":"2023-09-26T10:31:51","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=46892"},"modified":"2026-03-31T06:54:45","modified_gmt":"2026-03-31T06:54:45","slug":"common-size-income-statement","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/common-size-income-statement\/","title":{"rendered":"Common Size Income Statement"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Analyzing Income Statements (2024\/2025 CFA\u00ae Level I Exam \u2013 FSA \u2013 Learning Module 2)\",\n  \"description\": \"This video covers the analysis of income statements, including revenue and expense recognition principles, treatment of non-recurring items, EPS calculation, and financial performance evaluation using common-size income statements and ratios. It explains key implications for financial analysis and contrasts capitalized and expensed costs.\",\n  \"uploadDate\": \"2024-09-04T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/N817A4vtUeE\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/N817A4vtUeE\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/N817A4vtUeE\",\n  \"duration\": \"PT1H8M45S\"\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following statements is most accurate regarding the company\u2019s gross profit margin?\",\n    \"text\": \"The table below provides summary financial data for a company for the periods ended December 31, 2015, and December 31, 2016.\\n\\nRevenue:\\n2016: 2,500,000\\n2015: 1,700,000\\n\\nCost of goods sold:\\n2016: 1,200,000\\n2015: 600,000\\n\\nNet profit:\\n2016: 950,000\\n2015: 250,000\\n\\nWhich of the following statements is most accurate?\\n\\nA. The company\u2019s net profit margin was the same in both years.\\n\\nB. The company\u2019s gross profit margin in 2016 was higher than in 2015.\\n\\nC. The company\u2019s gross profit margin in 2015 was higher than in 2016.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C.\\n\\nGross profit margin is calculated as (Revenue \u2212 Cost of Goods Sold) \u00f7 Revenue. In 2015, the gross profit margin is (1,700,000 \u2212 600,000) \/ 1,700,000 \u2248 64.71%. In 2016, it is (2,500,000 \u2212 1,200,000) \/ 2,500,000 = 52.00%.\\n\\nTherefore, the gross profit margin was higher in 2015 than in 2016.\\n\\nOption A is incorrect because net profit margins differ between the two years. Option B is incorrect because the calculated gross profit margin is lower in 2016 than in 2015.\"\n    }\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/N817A4vtUeE\" 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&#8217;s performance across time periods (time series analysis) and across companies (cross-sectional analysis).<\/p>\n<p>A 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 concerning the percentage of expenses and profit relative to sales.<\/li>\n<li>It emphasizes variations in company strategies, prompting further investigation. For instance, if there&#8217;s a difference in the gross profit to sales ratio between two companies, it warrants additional research to comprehend the underlying reasons and their potential impact on the companies&#8217; future performance.<\/li>\n<\/ul>\n<p>Profitability describes one aspect of a company&#8217;s financial performance. Financial ratios and common-size income statements can assist in measuring profitability aside from offering quick insights into changes in a company&#8217;s financial performance.<\/p>\n<p>Several financial ratios can assist in measuring profitability. The net and gross profit margins are two ratios that may be found through common sizing of the income statement.<\/p>\n<div style=\"margin: 20px 0;\"><a style=\"display: block; width: 100%; text-align: center; padding: 10px; border: 2px solid #2f5bea; border-radius: 40px; font-size: 16px; color: #2f5bea; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Practice common-size income statement questions with our free trial. <\/a><\/div>\n<h2>Income Statement Ratios<\/h2>\n<h3>Net Profit Margin<\/h3>\n<p>A company&#8217;s return on sales or net profit margin measures the income generated for each dollar of revenue. In the form of an equation:<\/p>\n<p>$$ \\text{Net Profit Margin}=\\frac{\\text{Net Income} }{\\text{Revenue}} $$<\/p>\n<p>A higher level of net profit margin indicates a higher level of profitability.<\/p>\n<h3>Gross Profit Margin<\/h3>\n<p>The gross profit margin is another measure of profitability, which is calculated as follows:<\/p>\n<p>$$ \\text{Gross profit margin}=\\frac{\\text{Gross profit} }{\\text{Revenue}} $$<\/p>\n<p>Where gross profit = revenue minus the cost of goods sold.<\/p>\n<p>As the equation indicates, the gross profit margin measures the gross profit a company generates for each dollar of revenue. Like in the case of the net profit margin, a higher gross profit margin indicates a higher level of profitability.<\/p>\n<p><strong>Other Ratios<\/strong><\/p>\n<p>Other income statement ratios used by analysts include the operating profit margin and the pretax margin, whose formulas are as follows:<\/p>\n<p>$$\\text{Operating profit margin}=\\frac{\\text{Profit from operations}}{\\text{Revenue}}$$<\/p>\n<p>$$\\text{Pretax margin}=\\frac{\\text{Profit before tax}}{\\text{Revenue}}$$<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>The table below provides summary financial data for a company for the periods ended December 31, 2015, and December 31, 2016.<\/p>\n<p>$$ \\begin{array}{l|r|r}<br \/>&amp; \\text{December 31, 2016} &amp; \\text{December 31, 2015} \\\\ \\hline<br \/>\\text{Revenue} &amp; 2,500,000 &amp; 1,700,000 \\\\ \\hline<br \/>\\text{Cost of goods sold} &amp; 1,200,000 &amp; 600,000 \\\\ \\hline<br \/>\\text{Net profit} &amp; 950,000 &amp; 250,000<br \/>\\end{array} $$<\/p>\n<p>Which of the following statements is <em>most<\/em> accurate?<\/p>\n<ol type=\"A\">\n<li>The company&#8217;s net profit margin was the same in both years.<\/li>\n<li>The company&#8217;s gross profit margin in 2016 was higher than in 2015.<\/li>\n<li>The company&#8217;s gross profit margin in 2015 was higher than in 2016.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p><strong>The correct answer is C<\/strong>.<\/p>\n<p>The gross profit margin was higher in 2015 than in 2016, given that<\/p>\n<p>$$ \\begin{align*}<br \/>\\text{Gross profit margin in 2015} &amp; =\\frac{(\\$1,700,000-\\$600,000) }{\\$1,700,000}=64.71\\% \\\\<br \/>\\text{Gross profit margin in 2016} &amp; =\\frac{(\\$2,500,000-\\$1,200,000) }{\\$2,500,000}=52.00\\%<br \/>\\end{align*} $$<\/p>\n<p><strong>A is incorrect<\/strong> because the net profit margin in \\(2015 =\\frac{\\$250,000 }{\\$1,700,000}=14.71\\%\\)<\/p>\n<p><strong>B is incorrect<\/strong> because the gross profit margin was higher in 2015 than in 2016, as previously calculated.<\/p>\n<p>while net profit margin in \\(2016 =\\frac{\\$950,000}{\\$2,500,000}=38\\%\\). Therefore, the net profit margin is not the same in both years.<\/p>\n<\/blockquote>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 20px; border-radius: 999px; background-color: #1a73e8; color: #ffffff; text-decoration: none; font-weight: 600;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"font-size: 15px; margin-top: 12px; color: #555;\">Learn how to express income statement items as a percentage of revenue, analyze profit margins, and compare company performance across periods and peers\u2014key concepts tested in CFA Level I.<\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>Conversion of the income statement to a common-size income statement facilitates an assessment of a company&#8217;s performance across time periods (time series analysis) and across companies (cross-sectional analysis). A common-size analysis of the income statement is performed by stating each&#8230;<\/p>\n","protected":false},"author":7,"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-46892","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 Statement Explained | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn what a common size income statement is and how to prepare one. 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