What are the Standards for Making a Comparison?
The reason that works behind developing a common size financial statement is it can be easily compared. An analyst becomes capable of making comparisons of the COGS all across companies plus states the one which has got lower COGS minus any calculation.
So, utilizing a common size statement, an analyst looks at the financial statements step by step besides comparing them with various other companies. This aids him to have a good understanding of how a company has got various cost structure and asset structure compared to its competitors. Additionally, he also makes out whether or not it is favorable for the company.
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Benefits of Common Size Statement
Easy for understanding – Users of financial statements highly get benefitted from the common size statements for making clear regarding the percentage or ratio of every item to liabilities and total assets of a firm. For instance, when an analyst wishes to know about the position of the working capital, then he might determine the percentage of each element of present assets against a firm’s total assets besides the percentage share of every element of current liability.
Useful for Time Series Analysis – An analyst gets benefitted from a common size statement for discovering a trend related to the percentage share of every asset in percentage share and total assets of every liability.
Making comparisons – The analysts become capable of making comparisons of different financial performances as a percentage of decrease or increase of every component of liabilities, assets, cost, etc. remain available and so, they can ascertain their needed ratio.
Useful in analyzing structural arrangement – A common size statement aids the analysts to determine the structural relations of different constituents of expenses, liabilities, cost, assets, etc. to the needed total of liabilities or assets and capital.
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The Analysis of Common Size Statement
Common size analysis is a procedure that is useful for analyzing and interpreting the financial statements, and this technique aids in measuring the financial statement by taking into consideration every line item in the form of a percentage.
The process of common size statement is useful for interpreting 3 financial statements that include cash flow statement, income statement, and balance sheet.
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