To examine the trends over time within a single firm or compare firms of different sizes, you should use:
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A. B. C. D.C
Common size statements normalize the financial data to allow easier comparison of different-size firms.
To examine trends over time within a single firm or compare firms of different sizes, you should use common-size statements (option C). Common-size statements provide a standardized way of presenting financial information that allows for meaningful comparisons between different time periods or companies.
Common-size statements involve expressing each item on a financial statement as a percentage of a common base. The most common base used is total assets for the balance sheet and total sales or revenue for the income statement. By expressing financial items as percentages, it eliminates the effect of scale and size differences, allowing for easier comparisons.
Here's a breakdown of the other options:
A. Balance-sheet analysis: Balance-sheet analysis involves examining a firm's financial position at a specific point in time. It focuses on the assets, liabilities, and shareholders' equity reported on the balance sheet. While balance-sheet analysis provides valuable insights into a firm's financial health, it does not directly facilitate trends over time or comparisons between firms of different sizes.
B. Common industry analysis: Common industry analysis refers to analyzing and comparing companies within the same industry. It involves studying industry-specific factors, such as market trends, competitive dynamics, regulatory environment, and industry benchmarks. While industry analysis is useful for understanding the competitive landscape and industry trends, it may not capture the specific financial performance of individual firms over time.
D. Cash flow analysis: Cash flow analysis involves evaluating the inflows and outflows of cash within a firm. It focuses on understanding the sources and uses of cash, assessing cash liquidity, and evaluating the firm's ability to generate cash from its operations. While cash flow analysis provides insights into a firm's cash position and liquidity, it may not capture the complete financial performance or trends over time.
In summary, common-size statements are the most appropriate tool for examining trends over time within a single firm or comparing firms of different sizes. They provide a standardized approach that facilitates meaningful comparisons by expressing financial items as percentages of a common base.