Question

One of the most important applications of ratio analysis is to compare a company’s performance with that of other players in the industry or to compare its own performance over a period of time. Such analyses are referred to as a comparative analysis and trend analysis, respectively. A common size analysis requires the representation of financial statement data relative to a single financial statement item (or base account or value). What is the most commonly used base item for a common size balance sheet? Net income Earnings before interest and taxes Total assets Net sales

Answer 1

The most commonly used base item for a common size balance sheet is:

Total assets.

Step-by-step explanation:

The use of the total assets as an analytical base is because they are always equal to the two sides of the balance sheet in accordance with the accounting equation. This equation states that the Assets = Liabilities and Shareholders' Equity. A company can gain proper and good understanding of its performance by performing some financial analyses. Examples include comparative analysis (external-focused), trend analysis (internal-focused), and common size analysis (financial statement-focused).