I convert income statements to common-size income statements;

Question 1

A ‘vertical common-size income statement’

Answer 1

expresses each category of the income statement as a % of revenue

The common size format standardizes the IS by eliminating the effects of size>eliminating the effects of size> allows for comparisons of income statement items over time (time series) and across firm (cross sectional)

Question 2

Common-Size analysis uses

Answer 2

Reduce absolute $$ terms so that $$$ v $$ doesn’t matter and profitability can be compared on a relative basis

May be used to ID a firms STRATEGY

Question 3

Communicate common-size as

Answer 3

Seems that company Y spends more on ‘blah blah’ than company X. Well, spending on ‘blah blah’ is a ALOE, REGL, and could indicate that, blah blah!

Question 4

Spending more on research may allow a company to…

Answer 4

…charge a higher price for its product

Question 5

Expressing expenses as a % of rev is cool except for…

Answer 5

… income tax expense

Tax expense is more meaningful when expressed as a percentage of pretax income, a result known as ‘the effective tax rate.’