How do we standardize income statements to express each item as a percentage? Give a hypothetical...
How do we standardize income statements to express each item as a percentage? Give a hypothetical example as to how standardizing income statement can be useful to draw comparisons between two companies during a specific period.
Homework Answers
We can standardize the income statements to express each item as a percentage by putting the each item of the statements as a percent of Sales revenue. Like , if sales are $100000 and Advertising expense is $10000, then in the standardized format would be 10% (ie. 10000/100000).
The standardization of the Income Statement could be helpful in comparing two companies results during a specific period as:
|
Company A |
Company A-% |
Company B |
Company B-% |
|
|
Sales |
$100000 |
100% |
$500000 |
100% |
|
COGS |
40000 |
40% |
200000 |
40% |
|
GP |
60000 |
60% |
300000 |
60% |
|
ADMIN EXP. |
30000 |
30% |
150000 |
30% |
|
NP |
30000 |
30% |
150000 |
30% |
We can say that though the turnover of the Company B is five times of Company A, but the two companies expenses are in parity.
Thus, we can have inter-company comparison through Standardized Income Statement format.
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