Question

Which one of the following are correct in connection with the Common Size Statement?
(A) Expressed as a percentage on revenue from operation
(B) Horizontal analysis
(C) Vertical analysis
(D) Expressed as a percentage on total assets

• A. (A), (B), and (D) only
• B. (A), (B), and (C) only
• C. (A), (C), and (D) only
• D. (B), (C), and (D) only

Answer 1

The Correct Option is C

The correct options in connection with the Common Size Statement are (A), (C), and (D) only. Let's examine each option to understand why: 

• (A) Expressed as a percentage on revenue from operation: This is correct when analyzing income statements. Each line item is expressed as a percentage of total sales or revenue, helping in comparing financials across periods or companies of different sizes.
• (B) Horizontal analysis: This refers to the analysis of financial statements over multiple periods to see trends, such as growth rates. It is not directly related to the Common Size Statement, which is a vertical analysis.
• (C) Vertical analysis: This is indeed what Common Size Statements are; analyzing each line item as a percentage of a base item within the same financial period (e.g., total assets or total sales).
• (D) Expressed as a percentage on total assets: This corresponds to the Common Size Balance Sheet, where each line item is expressed as a percentage of total assets, helping in understanding the structure of a company's finances.

Thus, the correct answer is the combination of options (A), (C), and (D).

Answer 2

A Common Size Statement is a financial statement in which each line item is expressed as a percentage of a base amount (like revenue or total assets).

• (A) Expressed as a percentage on revenue from operation: This is correct because the common size statement often expresses each item as a percentage of total revenue.
• (B) Horizontal analysis: This is incorrect. Horizontal analysis compares financial data over multiple periods, not typically in a common size statement.
• (C) Vertical analysis: This is correct, as vertical analysis expresses each item as a percentage of the base figure (e.g., total assets or total revenue).
• (D) Expressed as a percentage on total assets: This is correct, as common size statements can also express each item as a percentage of total assets.

Thus, the correct answer is:

(3) (A), (C) and (D) only