Question

Which one of the following are correct in connection with the Common Size Statement?
(A) Expressed as a percentage on revenue from operation
(B) Horizontal analysis
(C) Vertical analysis
(D) Expressed as a percentage on total assets

• A. (A), (B), and (D) only
• B. (A), (B), and (C) only
• C. (A), (C), and (D) only
• D. (B), (C), and (D) only

Answer 1

The Correct Option is C

Understanding Common Size Statements 

A Common Size Statement is a financial statement that presents all items as a percentage of a base value. This allows for easier comparison of financial data across different periods or with other companies, regardless of their size. It's a powerful tool for financial analysis.

Key Concepts

• Base Value: The base value is the denominator used to calculate the percentages. Common bases are Total Revenue (for the Income Statement) and Total Assets (for the Balance Sheet).
• Vertical Analysis: Common Size Statements are primarily used for vertical analysis. This means examining the relationship of each line item to a base amount within a single reporting period.
• Purpose: To facilitate comparisons and identify trends, making it easier to assess a company's financial structure and performance.

Correct Statements about Common Size Statements

• (A) Expressed as a percentage of Revenue from Operations: CORRECT. Income Statement items are often presented as a percentage of total revenue, highlighting the proportion of each expense or profit item relative to sales.
• (C) Vertical Analysis: CORRECT. Common Size Statements are a key tool for performing vertical analysis, allowing assessment of each line item's proportion relative to the total.
• (D) Expressed as a percentage of Total Assets: CORRECT. Balance Sheet items are typically shown as a percentage of total assets, revealing the composition of a company's assets, liabilities, and equity.

Incorrect Statement

• (B) Horizontal Analysis: INCORRECT. Common Size Statements are used for vertical analysis, while horizontal analysis involves comparing financial information over multiple periods (e.g., year-over-year growth).

Conclusion

The correct statements are (A), (C), and (D).