![]() The common-size analysis is also useful for comparing the diversification of items on the financial statement-the diversification of incomes on the income statement, cash flows on the cash flow statement, and assets and liabilities on the balance sheet. ![]() The relative size of the items helps you spot anything that seems disproportionately large or small. For example, it is immediately obvious that Alice’s student loan dwarfs her assets’ value and creates her negative net worth.Ĭommon-size statements allow you to look at the size of each item relative to a common denominator: total income on the income statement, total positive cash flow on the cash flow statement, or total assets on the balance sheet. This common-size balance sheet allows “over-sized” items to be more obvious. This is the purpose of financial statement analysis: creating comparisons and contexts to gain a better understanding of the financial picture.įigure 3.16 Alice’s Common-Size Balance Sheet, December 31, 2009 Since the three statements offer three different kinds of information, sometimes it is useful to look at each in the context of the others, and to look at specific items in the larger context. The three provide a summary of earning and expenses, of cash flows, and of assets and debts. Each one-the income statement, cash flow statement, and balance sheet-conveys a different aspect of the financial picture put together, the picture is pretty complete.
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