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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

In a common-size income statement prepared for Aarav Traders Ltd, each line item is expressed as a percentage of which base?

The base is net sales, or revenue from operations, of the same year. Vertical analysis expresses every income statement item as a percentage of sales, which allows comparison across years and firms. Total assets is the base for balance sheets, and base-year figures belong to trend analysis.

  1. ATotal assets of the year
  2. BNet sales (revenue from operations) of the same yearCorrect
  3. CNet profit of the same year
  4. DCorresponding item of the base year

Explanation

A common-size income statement is a vertical analysis in which every item is expressed as a percentage of net sales or revenue from operations of the same year. Total assets is the base for the balance sheet, and the base-year item is used in trend analysis, not common-size analysis.

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