Common Size Analysis

The video tutorial explains how to analyze a company's financial performance using common size analysis. It introduces the concept of evaluating performance metrics as a percentage of a larger base, allowing for comparison across different companies or time periods. The tutorial covers two types of common size analysis: horizontal, which compares elements within the same time period, and vertical, which compares across different time periods. Examples are provided to illustrate how these analyses are applied in balance sheets and income statements, emphasizing the importance of using percentages to ensure comparability.

What is the primary purpose of analyzing financial performance using metrics as percentages?

• To reduce the liabilities of a company

• To increase the total assets of a company

• To compare financial elements on a common basis

• To determine the exact value of assets

In horizontal common size analysis, what is typically compared?

• The same unit across different companies

• The same company across different time periods

• Different companies or units within the same time period

• Different time periods within the same company

How does vertical common size analysis differ from horizontal analysis?

• It compares different companies in the same period

• It focuses on different units within a company

• It examines metrics across different time periods

• It uses absolute numbers instead of percentages

What is an example of a metric used in common size analysis on a balance sheet?

• Net income

• Debt to asset ratio

• Operating expenses

• Revenue growth

Why are percentage metrics important in income statements for common size analysis?

• They provide exact financial values

• They reduce the company's liabilities

• They allow for comparison on equal footing

• They increase the company's net income