{"id":3760,"date":"2019-10-08T13:33:00","date_gmt":"2019-10-08T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=3760"},"modified":"2026-02-25T10:49:11","modified_gmt":"2026-02-25T10:49:11","slug":"financial-analysis-common-size-income-statements","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/financial-analysis-common-size-income-statements\/","title":{"rendered":"Financial Analysis Using Common-size Income Statements"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following statements is correct?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A.\\n\\nRearranging the basic accounting equation, \u2018Assets = Liabilities + Equity\u2019, and making \u2018Equity\u2019 the subject, we see that \u2018Equity = Assets \u2013 Liabilities\u2019. B is incorrect because assets, not equity, refer to the resources of a company. C is incorrect because assets, not liabilities, refer to the things a company owns.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Equity refers to the resources of a company.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Equity is equal to Assets less Liabilities.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Liabilities refer to things which a company owns.\"\n      }\n    ],\n    \"answerCount\": 3\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"ABC Company reported total assets of $250,000 and total equity of $100,000. What is the value of the company\u2019s liabilities?\",\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is A.\\n\\nUsing the accounting equation Assets = Liabilities + Equity, liabilities can be calculated as L = A \u2013 E = $250,000 \u2013 $100,000 = $150,000.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"$150,000\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"$175,000\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"$350,000\"\n      }\n    ],\n    \"answerCount\": 3\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/VKYuCGCea20\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>The balance sheet is also known as the statement of financial position or statement of financial condition. It is a financial statement that gives a snapshot of a company\u2019s assets, and its sources of capital, i.e., liabilities and shareholder\u2019s equity, at a specific point in time. This provides vital information on what a company owns, what it owes, and what its owners\u2019 claims are.<\/p>\n<div style=\"margin:22px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n        display:block;\n        width:100%;\n        text-align:center;\n        padding:14px 0;\n        border:2px solid #2f5bea;\n        border-radius:40px;\n        text-decoration:none;\n        font-weight:500;\n        font-size:18px;\n        color:#2f5bea;\n        background-color:transparent;\n        box-sizing:border-box;\n     \">\n     Practice common-size analysis with our free trial.\n  <\/a>\n<\/div>\n<h2><strong>Elements of the Balance Sheet<\/strong><\/h2>\n<p>The three basic elements of the balance sheet are assets, liabilities, and equity.<\/p>\n<ul>\n<li>Assets refer to the resources which a company owns or controls because of past events and from which future economic benefits are expected to flow.<\/li>\n<\/ul>\n<ul>\n<li>Liabilities refer to anything which the company owes. These obligations occur because of past events and their settlement is expected to result in an outflow of economic benefits.<\/li>\n<\/ul>\n<ul>\n<li>Equity or shareholders\u2019 equity refers to the owners\u2019 residual interest in the company\u2019s assets after the deduction of its liabilities.<\/li>\n<\/ul>\n<p>The three basic elements may be represented in the form of the basic accounting equation:<\/p>\n<p>$$ \\text{Assets} = \\text{Liabilities} + \\text{Equity} $$<\/p>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>Which of the following statements is correct?<\/p>\n<p>B. Equity is equal to Assets less Liabilities.<\/p>\n<p>A. Equity refers to the resources of a company.<\/p>\n<p>C. Liabilities refer to things which a company owns.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Rearranging the basic accounting equation, \u2018Assets = Liabilities + Equity\u2019, and making \u2018Equity\u2019 the subject, we see that \u2018Equity = Assets \u2013 Liabilities\u2019.<\/p>\n<p><strong>B is incorrect<\/strong> because \u2018Assets\u2019, and not \u2018Equity\u2019, refer to the resources of a company.<\/p>\n<p><strong>C is incorrect<\/strong> because \u2018Assets\u2019, and not \u2018Liabilities\u2019, refer to things which a company owns.<\/p>\n<h3><strong>Question 2<\/strong><\/h3>\n<p>ABC Company reported a total assets value of $250,000 and a total equity value of $100,000. What is the value of the company\u2019s liabilities?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">$150,000<\/li>\n<li data-tadv-p=\"keep\">$175,000<\/li>\n<li data-tadv-p=\"keep\">$350,000<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>As a company\u2019s assets could be calculated as the sum of its liabilities and its equity:<\/p>\n<p>$$ \\text{Assets} = \\text{Liabilities} + \\text{Equity} $$<\/p>\n<p>Hence, the value of a company\u2019s liabilities is the result of deducting that company\u2019s equity from its liabilities.<\/p>\n<p>L = A \u2013 E = $250,000 \u2013 $100,000 = $150,000<\/p>\n<\/blockquote>\n<div style=\"text-align:center; margin:42px 0 10px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n        display:inline-block;\n        padding:16px 36px;\n        background-color:#3f78d7;\n        color:#ffffff;\n        text-decoration:none;\n        font-weight:600;\n        font-size:18px;\n        border-radius:40px;\n        line-height:1.1;\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"\n        margin-top:16px;\n        max-width:680px;\n        margin-left:auto;\n        margin-right:auto;\n        font-size:16px;\n        line-height:1.5;\n     \">\n     Solve CFA-style FRA questions and master common-size income statement interpretation.\n  <\/p>\n\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The balance sheet is also known as the statement of financial position or statement of financial condition. It is a financial statement that gives a snapshot of a company\u2019s assets, and its sources of capital, i.e., liabilities and shareholder\u2019s equity,&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-3760","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Common-Size Income Statements | CFA Level I<\/title>\n<meta name=\"description\" content=\"Learn how common-size income statements are used in financial analysis to evaluate profitability and compare performance across periods.\" \/>\n<meta name=\"robots\" content=\"index, follow, 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