From the course: Financial Accounting Part 2

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Common-size financial statements

Common-size financial statements

From the course: Financial Accounting Part 2

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Common-size financial statements

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- Financial statement analysis is much more than just the computation of a bunch of financial ratios that divide every financial statement number by every other number. To collect and present this information in a simple functional way, common-size financial statements should be considered. Now, the first problem encountered when using comparative data to analyze financial statements is that the scale or size of the numbers is usually different. If a firm has more sales this year than last year, it's now a larger company and the level of expenses and assets this year can't meaningfully be compared to the levels last year. In addition, how can the financial statements of a medium-size company be compared with those of a large company in the same industry? The quickest and easiest solution to this comparability problem is to divide all financial statement numbers for a given year by sales for the year. The resulting…

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