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Explain why "common size financial statements" are useful when an investor is making a comparison of...

Explain why "common size financial statements" are useful when an investor is making a comparison of the financial statements of a large company with those of a small company.

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Answer #1

Common size financial statements convert the financials of all small and big companies in terms of percentage of total sales in case of income statement and percentage of total assets in case of balance sheet. This conversion leads to so-called incomparable financial statements into comparable financial statements because numbers are in percentage denomination instead of monetary terms.

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