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

Which of the following best describes how items are presented on a common-size income statement?

Each item is shown as a percentage of net income.

Each item is shown as a percentage of current assets.

Each item is shown as a percentage of total assets.

Each item is shown as a percentage of total sales (revenue).

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Verified step by step guidance

Understand the concept of a common-size income statement: A common-size income statement is a financial statement where each line item is expressed as a percentage of a base figure, typically total sales (revenue). This allows for easy comparison across companies or periods, regardless of size differences.

Identify the base figure for a common-size income statement: The base figure used is total sales (revenue), as it represents the primary source of income for the business and serves as the denominator for calculating percentages.

Analyze how percentages are calculated: Each line item on the income statement, such as cost of goods sold, operating expenses, and net income, is divided by total sales (revenue) and then multiplied by 100 to express it as a percentage. For example, \( \text{Percentage} = \frac{\text{Line Item}}{\text{Total Sales}} \times 100 \).

Recognize the purpose of this presentation: By showing each item as a percentage of total sales, the common-size income statement highlights the relative importance of each expense or income category, making it easier to identify trends and compare performance across different companies or time periods.

Confirm the correct answer: Based on the explanation, the correct description is that each item on a common-size income statement is shown as a percentage of total sales (revenue).