A common size balance sheet or common size income statement expresses everything in percentages rather than...

A common size balance sheet or common size income statement expresses everything in percentages rather than in numbers. Your manager has just asked you why you need to spend the time and money to have your analyst create both a common size and a regular balance sheet and income statement. How would you respond to her?

Expert Solution

A common size financial statement displays all items as percentages of a common base figure rather than as absolute numerical figures. This type of financial statement allows for easy analysis between companies or between time periods for the same company.

The values on the common size statement are expressed as ratios or percentages of a statement component, such as revenue or income.

Common size financial statements reduce all figures to a comparable figure, such as a percentage of sales or assets.

While most firms don't report their statements in common size format, it is beneficial for analysts to compute it to compare two or more companies of differing size or different sectors of the economy.

To analyze the financial position of the business we should prepare a regular balance sheet and income statement, otherwise we cant trace the transactions and related amounts.

The purpose of a balance sheet is to give interested parties an idea of the company's financial position, in addition to displaying what the company owns and owes.

An income statement is important because it offers a recent picture of the company's revenues and expenses and overall profitability. Managers and investors can use this information to make financial decisions.

jeff jeffy answered 3 months ago

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