Common-Size Financial Statement: An Effective Tool for Financial Analysis

Analyzing Financial Statements with Common-Size Financial Statement

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Question

A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?

Answers

A. Determine which companies in the same industry are at approximately the same stage of development.

B. Evaluate financial statements of companies within a given industry of approximately the same value.

C. Ascertain the relative potential of companies of similar size in different industries.

D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a given industry without respect to relative size.

E. None of these answers.

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Explanations

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A. B. C. D. E.

Common-size financial statements present items in a financial statement as percentages of a common base. Comparison among firms in the same industry is made possible despite differences in size. Comparison of firms in different industries has drawbacks because the optimum mix of assets, liabilities, etc. will vary from industry to industry.

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