Question

Assertion (A): Common-size Income Statement is the vertical analysis of Income Statement.

Reason (R): In Common-size Income Statement, Revenue from Operations is taken as 100 while Other Income and Expenses are expressed as percentage of Revenue from Operations.

In the context of the above two statements, which option is correct?

Options

• Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

• Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation for Assertion (А).

• Assertion (A) is false, and Reason (R) is true.

• Assertion (A) is true, and Reason (R) is false.

Answer 1

Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation for Assertion (A).

Explanation:

Assertion (A) is correct because a Common-size Income Statement evaluates the proportional relationships of items within a single year, which is a vertical analysis. Reason (R) perfectly explains this vertical nature because it details the exact process: Revenue from Operations is set as the common base of 100%, and all other items (like other incomes and expenses) are calculated downwards as a percentage of that base.