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Discuss the importance of the common-size financial statements in strategic evaluation and control process.

Discuss the importance of the common-size financial statements in strategic evaluation and control process.

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Common size financial statements measure the financial statements in percentage terms with sales as a common base for the income statement and total of assets as a base for balance sheet. It is useful to evaluate the revenues and expenses as a percentage of sales for all income statement items and shows which expense holds a greater proportion in compared to the others. The item that has the highest ratio indicates that measures must be taken to reduce the cost and improve profitability. Also, when measured with balance sheet, its shows the ratio of debt and equity as a total of assets. If the assets are financed more by debt then it is a concern and threatens liquidity. An analysis of the common size balance sheet indicates the proportion of current assets as a percentage of total assets and if they are less than the benchmark it shows that the short term liquidity of the company is endangered and steps must be taken to improve it.

jeff jeffy answered 4 months ago
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