What is an income statement? An income statement is a financial statement that is used to summarize all the incomes and expenditures of a company over a given period. It takes into account the cumulative impacts of revenues, gains, expenditure, and loss transactions. The income statement is also known as a profit and loss statement (P&L) statement as it reports the profits or losses made by a company within a particular accounting period. For comparison purposes, the P&L statement is usually prepared quarterly or annually for comparisons between periods or analysis of financial trends over time (Stobierski, 2020).
What is the Formula for Percentage Income Statement?
The formula for the percentage income statement is simply the formula for the statement in which each item is expressed in percentage form.
From the Income Statement formula below we can deduce the same in terms of percentages.
Income Statement Formula
Gross Profit= Revenues-Cost of goods sold
Operating Income= Gross Profit – Operating Expenses
Net Income = Operating Income + Non-operating Items
(Thakur and Vaidya, 2022).
hence,
Percentage Income Statement Formula
% Gross Profit= % Revenues- %Cost of goods sold
% Operating Income= % Gross Profit – % Operating Expenses
% Net Income = % Operating Income + % Non-operating Items
For a single step the formula for the income statement can be represented as follows;
Net Income= Revenues – Expenses
In percentage form it is represented as:
% Net Income= 100% (Revenues)- % Expenses
How do we calculate the percentage income statement?
According to Lumen Learning, (2021), a simple income statement for a single year is calculated by expressing every item of the statement into a percentage relative to the net sales. The net sales are used as the base item for all the item values in the income statement.
The formula for the calculation of common size percentages is as follows
(Item Amount/Base Amount) x 100%
What is a Common-size income statement?
A common-size income statement refers to a P&L statement whereby each value item in the line is converted to the percentage of the base value. The base figure in most circumstances is usually the total sales or total revenues. Common-size income statements serve almost the same purpose as ratio analyses as they facilitate the comparison of financial statements or items across different accounting periods (GoCardless, 2022). A common-size income statement is used for vertical analysis when each value item in the statement is expressed as a percentage of the base figure (Vance, 2020).
Sample Income Statement for Common-size Percentages
| Synotech, Inc. | |||
| Income Statement | |||
| For year ended December 31 | |||
| Net Sales | $10,498.8 | 100.0% | ( 10,498.8 |
| 10,498.8 ) | |||
| Cost of goods sold | 5,341.3 | 50.9% | ( 5,341.3 |
| 10,498.8 ) | |||
| Gross profit | 5,157.5 | 49.1% | ( 5,157.5 |
| 10,498.8 ) | |||
| Selling, general and admin expenses | 3,662.5 | 34.9% | ( 3,662.5 |
| 10,498.8 ) | |||
| Other expense, net | 112.6 | 1.1% | ( 112.6 |
| 10,498.8 ) | |||
| Interest expense | 236.9 | 2.3% | ( 236.9 |
| 10,498.8 ) | |||
| Income before taxes | 1145.5 | 10.9% | ( 1,145.5 |
| 10,498.8 ) | |||
| Income tax expense | 383.5 | 3.7% | ( 383.5 |
| 10,498.8 ) | |||
| Net Income | 762 | 7.3% | ( 762 |
| 10,498.8 ) | |||
Source: Lumen Learning (2021)
What does the Percentage income statement tell us about the company?
The first thing we need to understand is that every item of Synotech income statement is expressed to the net sales as the base. Therefore, this statement tells us how the net sales amount is spent by the company. From the statement above we can thus deduce that 50.9% of the net sales are used to finance the cost of goods sold, 49.1% remains as the gross profit. Of the 49.1% that remains, 34.9% is used to finance the selling and general administration expenditures, 1.1 % finances other unspecified expenses, 2.3% goes to pay interests hence these deductions leave a 10.9% of income before taxes. Of the 10.9% that remains, 3.7 is deducted for taxation purposes and the company’s net income is 7.3% (Lumen Learning, 2021).
How do we prepare a percentage income statement for Trend Analysis?
To prepare the P&L statement for trend analysis, the P&L statement must be treated as a trend percentage whereby income statements from different accounting periods are prepared by selecting one period as the base period. The items in the other comparative periods are expressed about the respective items in the selected base period.
What is a trend percentage?
A trend percentage is an index number that is used for comparing financial items such as net sales, COGS, expenditure, gross income and inventories over a certain period to a base year or period. The trend percentage is used for trend or comparative analysis. It involves the analysis of current financial trends to predict the prospects of a business (Indeed Editorial Team, 2021). Trend analysis helps in the identification of areas that need further. Trend analysis can be conducted both vertically and horizontally to offer a meaningful basis for predicting the future.
How do we calculate trend percentages in the income statement?
The calculation or preparation of trend percentages is best done by organizing the periodic income statements in a tabular form. The following are the steps for calculating the trend percentages.
- Selection of the base period or year which is usually the earliest comparative period that is used for comparison with each subsequent period.
- Assigning weight of 100% to the amounts or figures that appear in the base year.
- Computing the trend percentages for the second period. This is done by dividing the amount in the second year by the respective amount in the base year and then multiplying it by 100%. A greater percentage than 100% indicates an increase in the trend above the base level. If the percentage is less than 100%, then it implies that the trend change is below the base level.
- Write down the result as a percentage in the third column.
- Repeat steps 3, 4 and 5 for the third year (Indeed Editorial Team, 2021).
Sample Income Statement before Conversion to Percentage
Source: Indeed Editorial Team (2021)
Using the above income statement, the trends for the percentage income statement can be calculated by using 2017 as the base year hence every item under the 2017 column is expressed as 100%. For the net revenue in 2018, the value is divided by the respective value in 2017 and then multiplied by 100 as follows:
What is the formula for calculating the percentage income statement?
The formula for calculating the percentage income statement is an expression of every single value for 2018 and 2019 to the base of the respective value in 2017. For example:
Net sales Percentage formula = (2018 net sales/2017 net sales) x 100
=118.99%.
All the other percentage values for the years 2018 and 2019 follow similar criteria as indicated in the percentage income statement below.
Percentage Income Statement
Source: Indeed Editorial Team (2021)
The percentage income statement is usually a comparative financial report that is used for assessing the financial performance of a company over a given period. The information obtained from the income statement can use for decision making by both the internal and external stakeholders. The preparation of the income statement in terms of percentages is important in comparing performance over different accounting periods for a firm. It allows for easy comparison and formation of snap judgment about the company’s performance in particular areas of their engagements such as revenue, expenses and cost of sales.
The information that is presented in terms of percentages can help in showing the areas that are in most need of. The data from the percentage income statement can be useful for comparison not only within the company but also with external competitors. Some of the periods for comparison can include comparing the performance in the current year with the previous year (Bcampus, 2022). Usually, the year that is used in preparing the percentage income statement is called the base year and is mostly a prior period. The items in the income statement are analyzed for changes in dollar percentages against the base period (Bcampus, 2022).
How do we analyze the percentage income statement?
The percentage income statement presents a simple way of analyzing the performance trends in an organization. The analysis is done by looking at the percentage change in the item values against the values in the base year. For example, in the above percentage income statement, we can analyze the sales revenue by comparing the 2019 percentage to the 2017 value. We can take the 2019 net percentage sales(113.78%) and subtract the 2017 net percentage sales (100%).
=113.78%-100%
= 13.78%
From this analysis, we can observe that the net percentage change in sales for 2019 is less than that of 2018 expressed to the base year. The 2018 net percentage sales analysis gives:
118.99%-100%
= 18.99%
It should be noted that the process of analysis just like computation continues for every item value in the percentage income statement for each period to the base of 2017 (Indeed Editorial Team, 2021).
What is the purpose of an income statement?
The purpose of an income statement is to display the financial performance of a company over a certain period. The basic purpose of the income statement is to tell if a company is generating profits or making losses. It presents the financial activities of a business which indicate whether the company is earning more than it spends. It also tells how much a company spends to produce or sell a particular product. It also tells whether the company has sufficient funds to invest back in the business. It also tells when the costs are high or low by looking at different accounting periods of business (Stobierski, 2020). Investors, accountants and business owners regularly review the income statement to understand how well a business is performing and utilize that knowledge to align its actions accordingly. Some of the decisions that various stakeholders can make from the income statement include; the decision to sell or buy an investment by an investor and the pivot strategy to achieve a certain target in the next period by an entrepreneur (Stobierski, 2020).
What Items are Contained in an Income Statement?
The income statement contains a detailed breakdown of various incomes achieved and expenses incurred over a given period. Some of the items contained in an income statement include;
Sales Revenue
This represents the amount of money generated by a business over the reporting period.
Expenses incurred by a business over the reporting period.
Costs of goods sold (COGS)
These represent the costs of the components of what the business produces or buys to present whatever product it sells.
Gross profit
The difference between the sales revenue and the cost of goods sold (COGS).
Operating Income
The gain obtained by a business is achieved by subtracting the operating expenses from the gross profit.
Income before taxes
This is obtained by subtracting the non-operating expenses from the operating income.
Net income
This represents the difference between the income before taxes and the taxes.
Earnings per share
This is achieved by dividing the net income realized by the total number of current shares.
Depreciation
This represents the lost value of an asset over a given period.
Earnings before interests, taxes, depreciation and amortization (EBITDA) (Stobierski, 2020).
What is the importance of a common-size analysis for an income statement?
The chief benefit of conducting a common-size analysis for an income statement is to make it easy for investors to read the drastic trends in the financial performance of a company especially when the performance is compared over some time such as two years and above. Common-size analysis helps in making investment decisions and implementing operational strategies such as cost-cutting, sales strategy and even developing expansionary strategies (Corporate Finance Institute, CFI, 2022). The common-size analysis also helps in comparing the performance of various companies within the same sector or industry. It helps in identifying the value items that give a competitive edge to a company within its industry of operation.
The analysis of common-size income statements can take the form of ratio analysis in which ratios can be calculated for certain items in the income statement such as raw materials, rent and utilities. These ratios can tell if a particular expense item makes up a very big or small proportion of the total expenses or costs (Vance, 2020). The ratios are obtained by dividing the values of one financial account or financial measurements with those of another as desired by the management. Tracking these ratios can help in the early identification of adverse trends and take action before they cause collateral damage to the company’s performance.
References
Bcampus (2022) Financial Statement Analysis. Principle of Accounting, Vol 1: Financial Accounting. https://www.opentextbc.ca/principlesofaccountingv1openstax/back- matter/financial-statement-anal;ysis/
Stobierski, T. (2020) How to Read and Understand an Income Statement. Harvard Business School Online. https://www.online.hbs.edu/blog/post/income-statements-analysis
Indeed Editorial Team (2021) How to Calculate Trend Percentage. Indeed. https://www.indeed.com/career-advice/career-development/how-to-calculate-trend- percentage
Lumen Learnig (2021) Common-Size Financial Statements. Lumen: Managerial Accounting. https://www.courses.lumenlearning.com.managacct/chapter/common-size-financial- statements/
GoCardless (2021) How to Create Common-size Income Statement. GoCardless Ltd. https://www.gocardless.com/guides/posts/what-is-common-size-income-statement/
Corporate Finance Institute, CFI (2022) Common Size Analysis. Corporate Finance Institute. https://www.corporatefinanceinstitute.com/resources/knowledge/finance/common-size- analysis/
Thakur, M. and Vaidya, D. (2022) Income Statement Formula. WallStreetMojo. https://www/wallstreetmojo.com/income-statement-formula/
Vance, H. (2020) The Income Statement. Simple Accounting.