1. A common size financial statement is a useful tool in performance evaluation
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Question
1. A common size financial statement is a useful tool in performance evaluation because it enables the user to: A. compare one company's performance in different periods B. evaluate the direction a business is taking over a longer period of time. C. evaluate relationships between key components in the financial statements. D. compare companies of different sizes in the same industry. 14-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall. Comparing one company against a competitor or against industry averages is called: A. benchmarking. B. comparative analysis. C. horizontal analysis. D. cost benefit analysis. 2.Explanation / Answer
Common size financial statements is very helpful in comparing companies of different sizes in same industry as it will help the persons how different things affect the company sales, Expenses …etc
Comparative Analysis helps one person to compare one company with another.
Trend = (Change / Base Year) *100
= ($55,000 / $100,000) * 100
= 55%
Accounts receivable ratio shows the company ability to collect from its accounts receivable.
Debt ratio = Total Debt / Total assets, it is related to all the debt of the company not the current Liabilities.
Rate of return on Total Assets helps the company to know how much profit they have earned on the capital invested by them. So it shows the profitability of the firm
Debt ratio = Total Debt / Total assets
= (105,000 + 110,000) / 330,000
Debt ratio = 0.65
Company is authorized to issue 200,000 shares but they issued only 100,000 shares in the beginning of the year so issued shares = 100,000
EPS = (Income – Pref. Dividend) / No. of Equity shares
= (400,000 – 30,000) / 100,000 Shares
EPS = $3.7
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