Channel: Edspira

Category: Education

Tags: common size income statementvertical analysis of income statementmanagement accountingcommon size statementscommon-sizevertical analysisfinancial statement analysisincome statementcommon size income statement analysiscommon-size income statementedspira

Description: A common-size income statement expresses each item as a percentage of sales (or revenues). This allows you to analyze changes in a company’s cost structure over time. The common-size income statement also shows you a company’s margins: how much of every sales dollar becomes profit. The common-size income statement is also helpful in spotting significant fluctuations in the financial statements. But a common-size income statement isn’t just used to assess a company’s performance over time. It’s also used to compare performance between companies. Scaling each line item by sales is very helpful when comparing: • Companies that report financial statements with different currencies • Companies that are of different sizes Example of Netflix vs Amazon common-size income statements A common-size income statement is a great tool for seeing how well a company is managing its costs: both over time, and in comparison to its peers. But you need to be careful when interpreting a common-size income statement. That’s because line items aren’t independent from one another. Remember, a common-size income statement doesn’t tell you whether a company’s costs went up or down, it tells you a company’s costs as a percentage of sales. 0:00 Introduction 0:25 Identifying a company's margins 0:30 Spotting fluctuations in the financial statements 1:03 Comparing performance between companies 1:25 Example: Netflix vs. Amazon 2:39 Summary 2:49 Caveat: items aren't independent from one another 3:39 Conclusion Here's the spreadsheet I used to create this video: docs.google.com/spreadsheets/d/1KD8qZtBb3AptgpEejWraI_O00kf_3JyvgKVvasPhdBA/edit?usp=sharing — Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people. — SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS: • A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING • A 44-PAGE GUIDE TO U.S. TAXATION • A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS • MANY MORE FREE PDF GUIDES * eepurl.com/dIaa5z — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: edspira.com/podcast-2 — GET TAX TIPS ON TIKTOK * tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * edspira.com/index — CONNECT WITH EDSPIRA * Facebook: facebook.com/Edspira * Instagram: instagram.com/edspiradotcom * LinkedIn: linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: twitter.com/Prof_McLaughlin * LinkedIn: linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * edspira.com/about