Since you are working on your MBA you have been asked to speak to the board...

Since you are working on your MBA you have been asked to speak to the board of directors of your firm about various methods of analyzing the companies financial statements. One of the board members states she has heard about a technique called"common-size" financial statements, but knows nothing about it. She would like you to explain what they are, how they are prepared,how they differ from regular financial statements, and how they can help the board in its decision making. What your account say?

Expert Solution

common size financial management refers to a financial statement (Income statement or Balance sheet) in which various items of income statement or balance sheets are expressed as a percentage of either total sales or of total assets. It is used in vertical analysis. A company financial statement that displays all itemsas percentages of a common base figure. This type offinancial statement allows for easy analysis between companies or between time periods of a company
It is prepared by dividing the individual items of income statement or balance sheet by the base value (sales or total assets) over the year.
For example
Balance sheet
Current assets			% of total assets
cash	100000	100000/1000000	10%
Bills receivables	500000	500000/1000000	50%
total current assets	600000	600000/1000000	60%
Plant and equipment	400000	400000/1000000	40%
total of assets	1000000	1000000/1000000	100%
These are different from the regular financial statement because in this individual items are expressed in percentage form for comparison purpose
These are helpful in making comaprison between the current and the previous years and also used for the postmortem or introspection of the financial statement

jeff jeffy answered 1 year ago

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