Question

Statement I: Comparative Statement shows change in all items of financial statements in absolute and percentage terms over a period of time for a firm or between two firms.

Statement II: Common-size Statement expresses all items of financial statement as a percentage of some base such as Revenue from Operations for Statement of Profit & Loss and Total Assets for Balance Sheet.

Options

• Both statements are correct.

• Both statements are incorrect.

• Statement I is correct, and Statement II is incorrect.

• Statement I is incorrect, and Statement II is correct.

Answer 1

Both statements are correct.

Explanation:

Both statements are correct because a Comparative Statement performs a horizontal analysis by calculating the absolute value changes and percentage changes for every item across different periods or firms, while a Common-size Statement performs a vertical analysis by converting each line item into a percentage of a common base, which is Revenue from Operations (Net Sales) for the Income Statement and Total Assets (or Total Liabilities) for the Balance Sheet.