Future Business Leaders of America (FBLA) Entrepreneurship Practice Test

When a financial statement is depicted in percentages for each item, it is referred to as what?

1. Common-Sized

2. Proportional

3. Comparative

4. Segmented

The correct answer is: Common-Sized

When a financial statement is depicted in percentages for each item, it is referred to as common-sized. This format allows for easier comparison across periods or between different companies by standardizing the financial data into a common form. For instance, in a common-sized income statement, each line item is expressed as a percentage of total sales, which helps stakeholders quickly understand the relative size of each expense, gross profit, and net income in relation to revenue. The common-sized approach is particularly beneficial for financial analysis because it highlights trends and performance ratios without being skewed by the absolute values, which might differ significantly between companies of varying sizes. This method aids investors and analysts in making apples-to-apples comparisons to assess operational efficiency, profitability, and overall fiscal health. Other terms such as proportional could imply a similar idea but are not specifically recognized as a standard term in finance. Comparative refers to looking at financial statements side-by-side across different periods or companies, but does not inherently denote the use of percentages. Segmented often applies to financial data presented separately by business unit or category, rather than converting all figures to a common-sized format. Therefore, common-sized is the precise term for financial statements expressed in percentages.