A common-size financial statement expresses each line item as a percentage of a base item, allowing for easy comparison across companies or periods, regardless of size. For the income statement, this typically means expressing each line item as a percentage of total revenue or sales.
When considering taxes in a common-size income statement, the taxes are usually represented as a percentage of total revenues or sales. The formula for calculating the common-size percentage for taxes can be expressed as:
\[ \text{Common-Size Percentage for Taxes} = \left( \frac{\text{Income Tax Expense}}{\text{Total Revenue}} \right) \times 100 \]
Example
Let's say a company has the following figures:
- Total Revenue: $1,000,000
- Income Tax Expense: $150,000
The common-size percentage for taxes would be calculated as:
\[ \text{Common-Size Percentage for Taxes} = \left( \frac{150,000}{1,000,000} \right) \times 100 = 15% \]
In this example, taxes would be represented as 15% of total revenue in a common-size income statement.
Other Considerations
- This approach can also be used for other expenses (like cost of goods sold, operating expenses, etc.) to provide a comprehensive view of how much of each dollar of revenue goes toward various costs, including taxes.
- Common-size analysis is particularly useful when comparing the financial performance of companies within the same industry, as it helps to normalize the impacts of size and scale.