On a common-sized single-step income statement, how is the current year's operating expense typically presented?

• A. As a percentage of gross profit
• B. As a percentage of net income
• C. As a percentage of total assets
• D. As a percentage of total revenues

Answer: (D)

Verified step by step guidance

1. Understand the concept of a common-sized single-step income statement: This type of income statement expresses each line item as a percentage of a common base, typically total revenues. This allows for easier comparison across periods or companies.
2. Identify the base for operating expenses: In a common-sized single-step income statement, operating expenses are presented as a percentage of total revenues, not gross profit, net income, or total assets.
3. Clarify why total revenues are used: Total revenues serve as the denominator because they represent the overall inflow of economic benefits during the period, making it a logical base for expressing operating expenses as a proportion of the company's activity.
4. Relate operating expenses to total revenues: To calculate the percentage, divide the operating expenses by total revenues and multiply by 100. This shows the proportion of revenues consumed by operating expenses.
5. Apply this understanding to the problem: The correct presentation of operating expenses on a common-sized single-step income statement is 'as a percentage of total revenues,' aligning with the standard practice in financial accounting.