Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Common-sized Statements

Financial Accounting

14. Financial Statement Analysis

Common-sized Statements

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Multiple Choice

What is the most commonly used base item for a common-size income statement?

Total liabilities

Net sales (or total revenue)

Gross profit

Total assets

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Verified step by step guidance

Understand the concept of a common-size income statement: A common-size income statement expresses each line item as a percentage of a base figure, allowing for easier comparison across companies or periods.

Identify the base figure typically used: In a common-size income statement, the most commonly used base figure is 'Net Sales' (or 'Total Revenue'). This is because net sales represent the total income generated by the company and serve as a benchmark for analyzing other components of the income statement.

Clarify why other options are not correct: 'Total liabilities' and 'Total assets' are balance sheet items, not income statement items. 'Gross profit' is a derived figure and not suitable as a base for percentage calculations in this context.

Explain the calculation process: To create a common-size income statement, divide each line item (e.g., cost of goods sold, operating expenses) by net sales and multiply by 100 to express it as a percentage. For example, \( \text{Percentage} = \frac{\text{Line Item}}{\text{Net Sales}} \times 100 \).

Highlight the purpose: The common-size income statement helps stakeholders analyze the relative proportions of revenue, expenses, and profits, making it easier to identify trends and compare performance across companies or time periods.