What do you mean by Common Size Statements?
Common Size Statements, also known as component percentage statements, are the statements in which each item is expressed as a percentage of a common base. For example, in a Common Size Balance Sheet, each asset is expressed as a percentage of total assets, and each liability is expressed as a percentage of total liabilities. Similarly, in the Common Size Statement of Profit and Loss, items are expressed as a percentage of revenue from operations.
These statements are useful for studying the key changes and trends in the financial position and operational results of a company. They facilitate intra-firm comparisons over different years and inter-firm comparisons between companies of different sizes in the same industry. This analysis is also known as Vertical Analysis.
Explanation
The answer defines Common Size Statements based on the provided text, highlighting that they express items as percentages of a common base (like Revenue from Operations or Total Assets). It explains the utility of these statements for comparing data across years (intra-firm) or between different-sized firms (inter-firm), referencing the concept of 'Vertical Analysis' as mentioned in the context.