Question 5: Explain how common size statements are prepared giving an example.
Answer:
Common size statements can be classified into two broad categories
(i) Common Size Income Statements
(ii) Common Size Balance Sheet
Common Size Statement is prepared in a columnar form for analysis. In a Common Size Statement, each item of the financial statements is compared to a common item. The analyses based on these statements are commonly known as Vertical Analysis. The following are the columns prepared in a Common Size Statement
(a) Particulars Column:This column shows the various financial items under their respective heads.
(b) Amount Columns :These columns depict the amount of each item, sub-totals and the gross total of a particular year.
(c) Percentage or Ratio Columns :These columns show the proportion of each item to the common item either in terms of percentage or ratio. The Common Size Statements can be presented in the following two ways. Method 1 Percentage column is shown beside the amount column of the year to which percentage column belongs.
Method 2 Amount columns are shown first and their percentage columns are shown after the amount columns.
Example :From the following information provided by Alfa Limited Prepare the Common Size Statements.
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