Q6RQ - Horngren'S Financial And Managerial Accounting

Question

Describe a common-size statement and how it might be helpful in evaluating a company.

Step-by-Step Solution

Answer

The common-sized statement refers to the preparation of financial statements that indicates different items as the percentage of a common base figure.

Step 1: Meaning of Common-size Statement

The common-sized statement is the method by which a financial statement is prepared in a way that its item indicates the percentage of common base figures.

Step 2: The usefulness of the common size statement is as follows

A common size statement is an income statement within which each item line is communicated as a percentage of assets or sales respectively. A common size statement is used to analyze and compare the performance within the company for several years and between the two companies.

 

Analysts use common-size financial statements to help them understand certain businesses and the possible future options. By looking at a common size percentage, an analyst can easily tell whether the company is cost-effective or not. It is also beneficial to make strategies.