Tag: preparation of common size statements

Questions Related to preparation of common size statements

Common size analysis is also known as ______ analysis.

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. Horizontal

  2. Ratio

  3. Vertical

  4. Trend

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Correct Option: C
Explanation:

Common size statement is a financial tool for studying the key changes and trends in the financial position and operational result of a company. common size analysis is also known as vertical analysis. Common size statements are useful, both, in inter-firm comparisons for the same year or for several years.

A common size balance sheet shows the percentage of each asset to the _____, and that of each liability to the ___. 

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. Total current assets, Total current liabilities

  2. Liabilities, Assets

  3. Total assets, Total liabilities

  4. None of the above

Show answer
Correct Option: C
Explanation:

Common size statement is stated as a percentage of the aggregate, of which that item is a part i.e. common size balance sheet shows the percentage of each asset to the total assets, and that of each liability to the total liabilities. The common size statement is also known as component percentage statement, is a financial tool for studying the key changes and trends in financial position and operational result of a company.

Choosing a common base (as 100), for example, sales revenue total may be taken as base (100) in case of income statement, and total assets or total liabilities (100) in case of balance sheet, is step ____ in the procedure adopted for preparing common size income statements.

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. 1

  2. 2

  3. 3

  4. 4

Show answer
Correct Option: B
Explanation:

Choosing a common base for example sales revenue total may ne taken as base (100) in case of income statement, and total assets or total liabilities in case of balance sheet, in step 2 in the procedure adopted for preparing common size income statements. Common-size Income statement is the vertical analysis of Income Statement. 

A vertical analysis is shows all items as percentages and not in absolute figures which provides better comparison. Each line item is expressed as a percentage figure of the base figure within the statement. The base is always shown as 100. 

Which of the following would best explain a situation where the ratio of (net income/Total equity) of a firm is higher than the industry average, while the ratio of (net income/Total assets) is lower than the industry average?

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. The firm's net profit margin is higher than the industry average

  2. The firm's assets turnover is higher than the industry average

  3. The firm's equity multiplier must be lower than the industry average

  4. The firm's debt ratio is higher than the industry average

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Correct Option: D

Common size financial statements make it easier to compare firms ____________.

book keeping and accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. of different sizes

  2. in different industries

  3. with different degree of leverage

  4. that use different inventory valuation methods (FIFO Vs. LIFO)

Show answer
Correct Option: A
Explanation:

Common size financial statements make it easier to compare firms of different sizes as they show all items as percentages and not in absolute figures which provides better comparison. 

Most common approach for analysing the capital structure of a firm is_______.

accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. Ration Analysis

  2. Cash Flow Analysis

  3. Comparative Analysis

  4. Leverage Analysis

Show answer
Correct Option: C
Explanation:

The most common approach for analyzing the capital structure of a firm is Comparative analysis. Comparative analysis is comparison of various ratios, balances, statements of different years of the company. 

It is basically done to understand the trend off the company. Hence, its also known as trend analysis.  

ABC Corp. wants to increase its current ratio from the present level of 1.5 when it closes the books next week. The action of ____________ will have the desired effect.

accountancy analysis of financial statements preparation of common size statements comparative statements and common-size statements tools of financial statement analysis - comparative and common-size statements

  1. payment of current payables from cash

  2. sales of current marketable securities for cash

  3. write down of impaired assets

  4. delay of next payroll

Show answer
Correct Option: A
Explanation:
Payment of current payables from cash will reduce current liabilities and also reduce current assets. 
Suppose if at the current position current assets are 1,50,000 and current liabilities 1,00,000 and if current payable repaid are 50,000. The new position will be 
    = 1,50,000 - 50,000
       --------------------------
        1,00,000 - 50,000
   = 1,00,000
    ----------------
       50,000
  2 : 1