COMMON SIZE STATEMENTS

Ratio analysis apart another useful way of analyzing financial statements is to convert them into common size statements by expressing absolute rupee amounts into percentages. When this method is pursued, the income statement exhibits each expense item or group of expense items as a percentage of net sales and net sales are taken at 100 per cent. Similarity, each individual asset and liability classification is shown as a percentage of total assets and liabilities respectively. Statements prepared in this way are referred to as common-size statements.

Common-size comparative statements prepared for one firm over the years would highlight the relative changes in each group of expenses, assets and liabilities. These statements can be equally useful for inter-firm comparisons, given the fact that absolute figures of two firms of the same industry are not comparable.

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