question asked: A common size balance sheet or common size income statement expresses everything in percentages rather than in numbers. Your manager has just asked you why you need to spend the time and money to have your analyst create both a common size and a regular balance sheet and income statement. How would you respond to her?
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In this case i would explain to my manager the reason of using both a common size and a regular balance sheet and income statement. In chapter 4, Common-size financial statements make it easier to evaluate changes in a firm’s performance and financial condition over time. They also allow you to make more meaningful comparisons between the financial statements of two firms that are different in size. (Parrino 2014). Two ways common size is conducted, vertical and horizontal. This will provide a simple way for financial managers to analyze financial statements. When I look at a balance sheet, the total assets value will equal to the total liabilities and shareholder equity. By using the common size analysis, manager’s will be able to see the structure compare to rivals. If i was handling to evaluate the financial health of an organization. I would prepare common size financial statement by using the quick ratio formula. Which current assets – inventory divided by current liabilities. The quick ratio is more conservative to get the net sale.
respond with 100 words^
I would respond to my manager by stating it would be necessary to create both a common size and a regular balance sheet along with an income statement for the following reasons. To begin with, a common size financial statement displays all items as percentages of a common base figure rather than as absolute numerical figures (according to investopedia.com). By utilizing this type of statement, it allows for a much easier analysis between companies or between time periods for the same company. Additionally, it provides assistance to investors by spotting different types of trends that a raw financial statement might not be able to provide. Not only that, but it also expresses the values on common sized statements as ratios of a statement component. It is understandable that many companies do not report the statements in this format, but I do believe it is more serviceable in the long run by being able to compare two or more different companies in whichever sizes they come. By providing a balance sheet, it gives an idea as to what the companyâ€™s financial position is in addition to what the companies assets and liabilities are to any parties that are interested. With an income statement, it is one of the most important factors in finance seeing as though it provides information to the company recent revenues and expenses which can help investors make a decision based on the information.
respond with 100 words^