Comparing Firms Using a Common-Size Balance Sheet Rests on the Assumption

question 26

Multiple Choice

Comparing firms using a common-size balance sheet rests on the assumption that

• A)the size or scale of a business does not affect the relation between a given balance sheet item and total assets.
• B)the size or scale of a business does affect the relation between a given balance sheet item and total assets.
• C)the large purchaser can negotiate better terms, including lower per-unit prices.
• D)more negotiating power would appear on the large purchaser's balance sheet as proportionately smaller amounts reported for inventory relative to the amounts reported by a smaller purchaser with less negotiating power.
• E)more negotiating power would appear on the large purchaser's balance sheet as proportionately larger amounts reported for accounts payable relative to the amounts reported by a smaller purchaser with less negotiating power.

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Definitions:

Fixed Assets

Long-term tangible assets used in the operation of a business that are not likely to be converted to cash within one year.

Capital Expenditures

Financial resources dedicated by a corporation towards the acquisition, betterment, and maintenance of real assets, like real estate, industrial plants, or machinery.

Collections

The process of obtaining payment of invoices owed by customers.

Insurance Premium

The amount paid periodically to an insurance company in exchange for coverage.