Answer to Question #152891 in Finance for Wajahat Ali Raki

Question

Why is it often necessary to standardize financial statements? (b) Name two types of standardized statements and describe how each is formed.

Answer 1

a) Why is it often necessary to standardize financial statements

Standardizing Financial statements is necessary because it allows comparison of financial statements across the year and are also useful for comparing companies of different sizes, particularly within the same industry.

b) Name two types of standardized statements and describe how each is formed.

The two types of standardized statements are Common Size Statements and Common Base Year Financial statements.

Common size statements are formed by expressing each item on a balance sheet as a percentage of total assets and each item on an income statement as a percentage of total sales.

Common Base Year statements are formed by choosing a base year and then express each item relative to the base amount.