Question

Using common-size balance sheet percentages to project individual assets, liabilities, or shareholders' equity has all of the following shortcomings except:

a. Individual assets, liabilities, and shareholders' equity are independent of each other.
b. The common-size percentages do not permit the analyst to easily change the assumptions about the future behavior of an individual asset or liability.
c. Individual assets, liabilities, and shareholders' equity are not independent of each other.
d. If a company experiences changing proportions for investments in securities among its assets, other asset categories may show decreasing percentages in some years even though their dollar amounts are increasing.

Answer 1

The correct answer is option c, stating that individual assets, liabilities, and shareholders' equity are not independent of each other; this interrelation is not a shortcoming of common-size balance sheet analysis.

Step-by-step explanation:

The question is focusing on the potential shortcomings of using common-size balance sheet percentages to project financial statements. The statement that individual assets, liabilities, and shareholders' equity are not independent of each other (c) is the correct option that is not a shortcoming of common-size balance sheet analysis. This means that these components are interrelated and changes in one can affect the others. On the other hand, options (a), (b), and (d) are actual shortcomings of using common-size balance sheets. Option (b) particularly highlights the inflexibility to alter assumptions for future projections easily since common-size percentages are historical and standardized across the items on the balance sheet.

It is also important to note the following information to better understand the context of financial statements analysis: With the increasing availability of information about a company's operations, potential investors such as bondholders and shareholders can make informed decisions without the need for personal connections within the company, which facilitates the process of raising capital for growth and expansion.