Common-Size Financial Statements

### What is a common-size financial statement primarily used for? - [x] Comparing companies of different sizes. - [ ] Assessing historical stock prices. - [ ] Forecasting future market trends. - [ ] Managing day-to-day operations. > **Explanation:** A common-size financial statement is used to make comparisons between companies of different sizes by expressing each line item as a percentage of a common base figure. ### In a common-size income statement, which line item is typically used as the base figure? - [x] Total Revenue - [ ] Total Assets - [ ] Net Income - [ ] Gross Profit > **Explanation:** In a common-size income statement, total revenue is typically used as the base figure. ### If a company’s total sales are $800,000 and its selling expenses are $160,000, what percentage of total sales do the selling expenses represent? - [ ] 10% - [ ] 15% - [x] 20% - [ ] 25% > **Explanation:** Selling expenses of $160,000 expressed as a percentage of total sales of $800,000 represent 20% (160,000 / 800,000 = 0.20). ### What benefits do common-size financial statements provide to analysts? - [ ] Increasing the total revenue - [ ] Determining the age of assets - [x] Facilitating easier comparison - [ ] Improving operational efficiency > **Explanation:** Common-size financial statements facilitate easier comparison between companies of different sizes and with industry standards. ### How is a common-size balance sheet most effectively compared? - [ ] By looking at quantitative amounts only - [x] By comparing the percentage of total assets - [ ] By assessing market share - [ ] By analyzing non-financial metrics > **Explanation:** A common-size balance sheet is most effectively compared by looking at each item as a percentage of the total assets. ### Which type of financial analysis is facilitated by common-size financial statements? - [ ] Day-to-day operational analysis - [ ] Compliance standards - [x] Vertical and horizontal analysis - [ ] Global economic trends > **Explanation:** Common-size financial statements are used for vertical and horizontal analysis by comparing proportions within a single period or across different periods. ### When using common-size financial statements, discrepancies can indicate what? - [ ] Industry benchmarks - [x] Potential inefficiencies - [ ] Customer demographics - [ ] Stock performance > **Explanation:** Discrepancies in common-size financial statements when compared to industry averages can indicate potential inefficiencies within the company. ### How can investors use common-size financial statements? - [ ] To calculate stock prices - [x] To compare financial health across companies - [ ] To set dividend policies - [ ] To manage supply chains > **Explanation:** Investors can use common-size financial statements to compare the financial health and performance of different companies. ### What is the main advantage of converting financial figures to common-size terms? - [ ] It simplifies daily accounting tasks. - [x] It standardizes data for comparison. - [ ] It reduces tax liabilities. - [ ] It increases profit margins. > **Explanation:** The main advantage is that it standardizes financial data, making it easier to compare. ### In a common-size statement, what is the significance of an item expressed as 35%? - [ ] It guarantees a 35% return. - [ ] The item is always 35% of total liabilities. - [ ] The cost is below the industry average. - [x] The item is 35% of the base figure (e.g., total revenue or total assets). > **Explanation:** An item expressed as 35% in a common-size statement indicates that it represents 35% of the base figure being analyzed, such as total revenue or total assets.