Common-size financial statements are created by dividing all income statement items and balance sheet accounts by total assets.

• A. False
• B. True
• C. Only income statement items by total assets
• D. They are created by dividing by net income

Answer: (A)

Common-size statements standardize each line item to a single base. For the balance sheet, the base is total assets, but for the income statement the usual base is net sales (revenue). Dividing income statement items by total assets would mix bases and misrepresent how costs and margins relate to sales, making comparisons less meaningful. So, income statement items are expressed as a percentage of net sales, while balance sheet items are expressed as a percentage of total assets. This makes the statement false.