Principles of Expense Recognition
The IASB Conceptual Framework defines expenses as reductions in economic benefits occurring throughout... 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:
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.