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

The correct options pertaining to the Common Size Statement are (A), (C), and (D). The rationale for each is as follows:

• (A) Expressed as a percentage on revenue from operation: This method is applicable to income statements. Each item is presented as a percentage of total revenue, facilitating comparisons across different timeframes or entities of varying scales.
• (B) Horizontal analysis: This technique involves analyzing financial statements across multiple periods to identify trends, such as growth. It differs from the Common Size Statement, which employs vertical analysis.
• (C) Vertical analysis: This accurately describes the nature of Common Size Statements, where each line item is expressed as a percentage of a base figure within the same reporting period (e.g., total assets or total revenue).
• (D) Expressed as a percentage on total assets: This applies to the Common Size Balance Sheet, where each component is stated as a percentage of total assets, providing insight into the company's financial structure.

Consequently, the correct selections are (A), (C), and (D).