Final answer:
In a common size income statement, operating expenses are expressed as a percentage of net sales. This method enables comparison across companies and time periods. The percentage is calculated by dividing total operating expenses by net sales and multiplying by 100.
Step-by-step explanation:
In a common size income statement for 2021, the operating expenses are expressed as a percentage of net sales. This approach normalizes the expenses, making it easier to compare companies of different sizes or to analyze a company's performance over different periods. Operating expenses include costs like labor, materials, and overhead that are directly tied to the operation of the business. For instance, to calculate the percentage of operating expenses to net sales, you would divide the total operating expenses by the net sales and then multiply by 100 to get the percentage.
Example:
If a firm had sales revenue of $1 million last year and spent $600,000 on labor, $150,000 on capital, and $200,000 on materials, you would add up those expenses to find the total operating expenses, which would be $950,000. This sum would then be divided by the total sales revenue, $1 million, giving an operating expenses percentage of 95% ($950,000 / $1,000,000 x 100).
The accounting profit would simply be the sales revenue minus the sum of these operating expenses, which in this case is $50,000 ($1 million - $950,000).