I convert income statements to common-size income statements; Flashcards Preview

L1 25 Understanding Income Statements > I convert income statements to common-size income statements; > Flashcards

Flashcards in I convert income statements to common-size income statements; Deck (5)
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1
Q

A ‘vertical common-size income statement’

A

expresses each category of the income statement as a % of revenue

The common size format standardizes the IS by eliminating the effects of size>eliminating the effects of size> allows for comparisons of income statement items over time (time series) and across firm (cross sectional)

2
Q

Common-Size analysis uses

A

Reduce absolute $$ terms so that $$$ v $$ doesn’t matter and profitability can be compared on a relative basis

May be used to ID a firms STRATEGY

3
Q

Communicate common-size as

A

Seems that company Y spends more on ‘blah blah’ than company X. Well, spending on ‘blah blah’ is a ALOE, REGL, and could indicate that, blah blah!

4
Q

Spending more on research may allow a company to…

A

…charge a higher price for its product

5
Q

Expressing expenses as a % of rev is cool except for…

A

… income tax expense

Tax expense is more meaningful when expressed as a percentage of pretax income, a result known as ‘the effective tax rate.’

Decks in L1 25 Understanding Income Statements Class (10):