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In a common-size income statement, each item on the statement is expressed as a percentage of:

• Net income
• Expenses
• Gross profit
• Revenue

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In a common-size balance sheet, each item on the balance sheet is typically expressed as a percentage of:

• Assets
• Net income
• Equity
• Sales revenue

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A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?

• Ascertain the relative potential of companies of similar size in different industries.
• Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size.
• Determine which companies in the same industry are at approximately the same stage of development.
• Evaluate financial statements of companies within a given industry of approximately the same value.

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When using common-size statements:

• All of these are correct.
• Dollar changes are reported over a period of at least three years.
• Data may be selected for the same business as of different dates, or for two or more businesses as of the same date.
• Relationships should be stated in terms of ratios.

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Which of the following below generally is the most useful in analyzing companies of different sizes?

• Price-level accounting
• Audit report
• Comparative statements
• Common-sized financial statements

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How should you compute the number that appears as "cost of goods sold" in a common-size income statement?

• Cost of goods sold divided by sales
• Sales divided by cost of goods sold
• Net income divided by cost of goods sold
• Total equity divided by cost of goods sold
• Cost of goods sold divided by total equity
• Cost of goods sold divided by net income

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How should you compute the number that appears as "accounts receivable" in a common-size balance sheet?

• Accounts receivable divided by net income
• Net income divided by accounts receivable
• Accounts receivable divided by total equity
• Accounts receivable divided by sales
• Total equity divided by accounts receivable
• Sales divided by accounts receivable

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Lowden Point Company has these common-size income statements for Year 1 and Year 2:

Year 1 Year 2

Sales 100% 100%

Cost of Goods Sold 68% 60%

Wage Expense 13% 21%

Rent Expense 4% 4%

Advertising Expense 2% 2%

Net Income 13% 13%

Which ONE of the following statements is true?

• In Year 2, Rent Expense is a problem.
• In Year 2, Cost of Goods Sold is a problem.
• In Year 2, Advertising Expense is a problem.
• In Year 2, Wage Expense is a problem.

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Long Pond Company has these common-size income statements for Year 1 and Year 2:

Year 1 Year 2

Sales 100% 100%

Cost of Goods Sold 45% 45%

Wage Expense 30% 21%

Rent Expense 4% 20%

Advertising Expense 10% 10%

Net Income 11% 4%

Which ONE of the following statements is true?

• In Year 2, Rent Expense is a problem.
• In Year 2, Advertising Expense is a problem.
• In Year 2, Wage Expense is a problem.
• In Year 2, Cost of Goods Sold is a problem.

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New Edgemere Company has this asset section of itscommon-size balance sheets for Year 1 and Year 2:

Year 1 Year 2

Cash 4% 4%

Accounts Receivable 15% 25%

Inventory 30% 21%

Property, Plant, and Equipment 50% 40%

Which ONE of the following statements is true?

• In Year 2, efficient management of Cash is a problem.
• In Year 2, efficient management of Inventory is a problem.
• In Year 2, efficient management of Property, Plant, and Equipment is a problem.
• In Year 2, efficient management of Accounts Receivable is a problem.