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CMA Intermediate · Financial Management and Business Data Analytics · Comparative, Common-Size Financial Statements and Trend Analysis

Which is the main advantage of preparing common-size statements when comparing two companies of very different sizes?

Common-size statements express each item as a percentage of a common base such as revenue or total assets. This removes the effect of scale, so companies of different size, or the same company across years, can be compared on structure directly.

  1. AThey remove the effect of size by expressing every item as a percentage of a common baseCorrect
  2. BThey show the absolute rupee growth of each item over time
  3. CThey eliminate the need for a balance sheet
  4. DThey forecast future profits using regression

Explanation

Common-size statements express items as percentages of a base such as revenue or total assets, so the structure of firms of different size can be compared directly. They do not show absolute growth, which is the job of comparative statements or trend analysis.

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