Final answer:
Common-size income statements are useful because they allow for easy comparison across companies, help in identifying areas for cost reduction, and simplify tracking financial trends over time.
Step-by-step explanation:
A common-size income statement is a powerful tool for business decision-makers for several reasons. First, it provides a clear picture of how each expense affects the company's overall profitability, helping to identify areas where cost savings can be most effective. By expressing each expense category as a percentage of sales, it is easier to compare the company's cost structure to industry standards or to past performance.
Secondly, common size statements are useful for financial analysis and comparison between companies of different sizes. Because the income and expenses are standardized as percentages of sales, it allows for a direct comparison of financial health and efficiency, independent of the companies' absolute scale. This comparative analysis can aid in benchmarking and strategic planning. Lastly, using a common-size income statement simplifies the task of tracking changes over time. Decision-makers can swiftly detect variations in financial performance and can readily attribute these changes to either a rise in sales, a change in costs, or a move in both. Trends become more apparent, allowing for more informed financial forecasts and adjustments.