Question

A common-size balance sheet helps financial managers determine:

A. which customers are paying on a timely basis.
B. if costs are increasing faster or slower than sales.
C. if changes are occurring in a firm's mix of assets.
D. if a firm is generating more or less sales per dollar of assets than in prior years.
E. the rate at which the firm's dividends are changing.

Answer 1

A common-size balance sheet helps in analyzing changes in a firm's mix of assets by standardizing all balance sheet items as a percentage of total assets, thus facilitating comparative analysis.

Step-by-step explanation:

A common-size balance sheet helps financial managers determine if changes are occurring in a firm's mix of assets. It is a financial statement that presents all items in percentage terms with the assets set at 100 percent and every other balance sheet item as a percentage of total assets.

The use of a common-size balance sheet allows for easy comparison across years or with other companies by standardizing the information. For example, a company's inventory might be 30% of total assets this year compared to 25% last year, indicating a change in the asset mix. Similarly, a company might compare its asset structure to industry averages to gauge its performance.

While the common-size balance sheet can highlight trends and make comparative analysis more straightforward, it does not provide information on timely payments by customers, costs relative to sales, sales per dollar of assets, or the rate of change in dividends as those details are typically derived from other financial statements such as the income statement or the statement of cash flows.