3.2 - Standardized Financial Statements

Question 1

What is the purpose of standardizing financial statements?

Answer 1

So we can compare financial statements of different companies:

If they are not standardized we could not compare them because:
- Companies are different sizes
- Companies often span multiple indistries

Question 1

Define Common-Size Statement

Answer 1

A standardized financial statement presenting all items in percentage terms

Question 2

How do we express each item on the following statements:

• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Cash Flow

Answer 2

Statement of Financial Position:
- express each item as a percentage of total assets (which is also a percentage of total L + OE because they are equal_

Statement of Comprehensive Income
- express each item as a percentage of total revenue/sales

Statement of Cash Flow
- there is no obvious denominator - you can express as a percentage of total sources OR total uses

Question 3

Define Common-Base Year Statement

Answer 3

a standardized financial statement presenting all items relative to a certain base year

(choose a base year and express all items relative to the base amounts)