Which one of the following is correct in connection with the Common Size Statement?

(A) Expressed as percentage on revenue from operation

(B) Horizontal analysis

(C) Vertical analysis

(D) Expressed as percentage on total assets

Choose the correct answer from the options given below :

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

The correct answer is option 3- (A), (C), and (D) only.

(A) Expressed as percentage on revenue from operation- This is true. In the common size statement of profit and loss, the items of expenditure are shown as a percentage of the revenue from operations. If such a statement is prepared for successive periods, it shows the changes of the respective percentages over a period of time.

(B) Horizontal analysis- This is wrong. Comparative statement is horizontal analysis. Comparative Statements are the statements showing the profitability and financial position of a firm for different periods of time in a comparative form to give an idea about the position of two or more periods. The financial data will be comparative only when same accounting principles are used in preparing these statements. Comparative figures indicate the trend and direction of financial position and operating results. This analysis is also known as ‘horizontal analysis’.

(C) Vertical analysis- This is true. Common Size Statements are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as a percentage of that common item. The percentage thus calculated can be easily compared with the results of corresponding percentages of the previous year or of some other firms, as the numbers are brought to common base. Such statements also allow an analyst to compare the operating and financing characteristics of two companies of different sizes in the same industry. Thus, common size statements are useful, both, in intra-firm comparisons over different years and also in making inter-firm comparisons for the same year or for several years. This analysis is also known as ‘Vertical analysis’.

(D) Expressed as percentage on total assets- This is true. A common size balance sheet shows the percentage of each asset to the total assets, and that of each liability to the total liabilities.