What is the purpose of using common size balance sheets and common size income statements?
Answer: The purpose is to allow a company to compare its performance with its own prior performance or with the performance of other firms. It is not helpful to just compare numbers, but with common size statements firms can compare percentages, so that they can answer questions about how their own performance changed, and how their performance compares to that of other firms.
The principal reason for preparing common size statements is
A) to make meaningful comparisons between firms that are not the same size.
B) to make meaningful comparisons between different fiscal years.
C) to eliminate the effects of inflation.
D) to make meaningful comparisons between firms in different industries.
Common size financial statements represent all figures on the financial statements
A) in inflation adjusted dollars from a base year.
B) as if all companies being compared had the same total revenue.
C) as if all companies being compared had the same total assets.
D) as a percentage of either sales or total assets.
Common size income statements represent all figures on the income statement
A) as a percentage change from the previous year.
B) percentages of the current year's sales.
C) as a percentage of some benchmark figure.
D) as a percentage of total assets.
Common size balance sheets represent all figures on the balance sheet
A) as a percentage change from the previous year.
B) percentages of the current year's sales.
C) as a percentage of some benchmark figure.
D) as a percentage of total assets.
On a common size balance sheet, total assets are equal to 100%.
Answer: TRUE
On a common size income statement, EBIT is equal to 100%.
Answer: FALSE
By using common size income statements, firms can determine how various expenses as a percentage of total sales changed from period to period.
Answer: TRUE
