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Financial ratios are used to express one financial quantity with reference to another.... Read More
Conversion of the income statement to a common-size income statement facilitates an assessment of a company’s performance across time periods (time series analysis), and across companies (cross-sectional analysis).
Common-size analysis of the income statement is performed by stating each line item on the income statement as a percentage of revenue. Benefits of common-sizing the income statement include:
- it allows for meaningful comparison between companies with respect to the percentage of expenses and profit relative to sales; and
- it highlights any differences that may exist between company strategies. For example, the difference between the ratio of gross profit to sales for two companies may lead to more research being done in order to understand the underlying reasons for the difference and their implications for the future performance of the companies.
Question
The presentation of which of the following ratios would indicate that a company’s income statement has been common-sized?
- Net profit/Revenue.
- Capital/Total assets.
- Net income/Average assets.
Solution
The correct answer is A.
Common-sizing the income statement is performed by stating each line item on the income statement as a percentage of revenue. https://analystprep.com/ ambient_generic gmod The ratio of net profit/revenue would be derived in this manner.
B is incorrect because the ratio of capital/total assets is computed using balance sheet items only.
C is incorrect because the ratio of net income/average assets is computed using both balance sheet and income statement items.
Sergio Torrico
2021-07-23
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Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
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2021-07-17
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2021-07-16
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2021-03-24
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2021-03-18
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