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Q.

From the following information, prepare a Common size Income Statement for the year ended March 31, 2016 and March 31, 2017:

Particulars2016-17 (₹)2015-16 (₹)
Revenue from operations18,00,00025,00,000
Cost of goods sold10,00,00012,00,000
Operating expenses80,0001,20,000
Non-operating expenses12,00015,000
Depreciation20,00040,000
Wages10,00020,000

(Wages are part of the cost of goods sold; depreciation is part of the operating expenses.)

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✓ Free question

Take revenue from operations as 100% and express every item as a percentage of it. Gross Profit = Revenue − Cost of goods sold; Operating Income = Gross Profit − Operating expenses; Profit = Operating Income − Non-operating expenses. The profit margin falls from 46.60% (2015-16) to 39.33% (2016-17).

Concept

A common size statement (a vertical-analysis tool in the NCERT Class 12 Accountancy syllabus) expresses each item as a percentage of a common base — for an income statement the base is revenue from operations = 100%. It strips out the effect of size so you can compare the cost structure across years or across firms.

Working Notes

  • Wages (₹20,000 / ₹10,000) are part of cost of goods sold — not shown separately.
  • Depreciation (₹40,000 / ₹20,000) is part of operating expenses — not shown separately.
  • Each percentage = item ÷ revenue from operations × 100 (e.g. 2016-17 cost of goods sold = 10,00,000 ÷ 18,00,000 × 100 = 55.56%).

Solution

Common Size Income Statement for the years ended March 31, 2016 and March 31, 2017

Particulars2015-16 (₹)2016-17 (₹)2015-16 (% of Revenue)2016-17 (% of Revenue)
Revenue from operations25,00,00018,00,000100100
Less: Cost of goods sold12,00,00010,00,0004855.56
Gross Profit13,00,0008,00,0005244.44
Less: Operating expenses1,20,00080,0004.804.44
Operating Income11,80,0007,20,00047.2040
Less: Non-operating expenses15,00012,0000.600.67
Profit11,65,0007,08,00046.6039.33
✓Final answer

Cost of goods sold rose from 48% to 55.56% of revenue, dragging gross profit down from 52% to 44.44% and the overall profit margin from 46.60% to 39.33% — a clear deterioration in the cost structure that common size analysis brings out.

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