CFA Level I · CFA Level I Exam · Analyzing Income Statements
An analyst wants to compare the cost structure of a small domestic manufacturer with that of a much larger foreign competitor reporting in a different currency. The most appropriate tool is:
A common-size income statement for each company is most appropriate. Expressing every line item as a percentage of revenue removes the effects of company size and reporting currency, so the analyst can compare cost structures and margins directly rather than relying on absolute amounts.
- Aa common-size income statement for each company.Correct
- Ba comparison of absolute operating expenses in a single currency.
- Ca comparison of each company's absolute net income growth.
Explanation
Common-size statements express items as percentages of revenue, removing differences in size and currency so cost structures can be compared directly. Absolute figures are distorted by scale and exchange rates.
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