What is the most commonly used base item for preparing a common size balance sheet?

• A. Total liabilities
• B. Total revenues
• C. Net income
• D. Total assets

Answer: (D)

Verified step by step guidance

1. Understand the concept of a common size balance sheet: A common size balance sheet expresses each item as a percentage of a base item, allowing for easier comparison across companies or periods.
2. Identify the base item used for the common size balance sheet: The base item should represent the total resources or financial position of the company. In this case, it is 'Total assets.'
3. Explain why 'Total assets' is used: Total assets provide a comprehensive view of the company's financial position, as they include all resources owned by the company, both current and non-current.
4. Clarify why other options are not correct: 'Total liabilities' only represent obligations, not the full financial picture. 'Total revenues' and 'Net income' are related to the income statement, not the balance sheet.
5. Conclude that 'Total assets' is the correct base item for preparing a common size balance sheet, as it allows each balance sheet item to be expressed as a percentage of the company's total resources.