Study Unit 1.1: Common Size Financial Statements

Question 1

Purpose of Common-Size financial Statements

Answer 1

Common-size financial statements restate financial statement line items in terms of percentages of a given amount so that the financial statements of steadily growing firms and firms of different sizes can be Common-size financial statements restate financial statement line items in terms of percentages of a given amount so that the financial statements of steadily growing firms and firms of different sizes can be analyzed and compared. analyzed and compared.

Question 2

Define Capital Structure

Answer 2

A firm’s capital structure includes its sources of financing, both long- and short-term. The sources of financing may be either in the form of debt (external financing) or equity (internal financing).

Question 3

Define operating leverage.

Answer 3

Leverage is the relative amount of fixed cost in a firm’s overall cost structure.