Explanation:

Preparing a common-size balance sheet involves expressing each item on the balance sheet as a percentage of another specific item. In this case, the correct answer is option 'D', which means that each item on the balance sheet is expressed as a percentage of the total assets or total liabilities.

Reasoning:

The common-size balance sheet is a useful financial analysis tool that allows for easy comparison and evaluation of a company's financial performance over time or against industry benchmarks. By expressing each item as a percentage of the total assets or total liabilities, it helps to identify the proportionate contribution of each item to the overall financial structure of the company.

Benefits of expressing each item as a percentage of total assets or total liabilities:

1. Comparability: Expressing each item as a percentage of the total assets or total liabilities allows for easy comparison between different periods or different companies. This is because the relative importance of each item is highlighted, regardless of the size of the company or the total asset or liability base.

2. Trend analysis: By expressing each item as a percentage of the total assets or total liabilities, it becomes easier to identify trends and changes over time. For example, if a specific item's percentage increases over multiple periods, it indicates a growing importance or a potential risk associated with that item.

3. Proportionate analysis: Expressing each item as a percentage helps in understanding the relative proportion of each item to the total assets or total liabilities. This can provide insights into the company's financial structure, capital allocation, and risk management strategies.

4. Identifying outliers: By expressing each item as a percentage, it becomes easier to identify outliers or unusual items. For example, if a specific item's percentage is significantly higher or lower than the industry average, it may indicate a potential problem or opportunity that requires further investigation.

Overall, expressing each item on the balance sheet as a percentage of total assets or total liabilities in a common-size format provides a standardized and meaningful way to analyze and compare financial statements. It helps in identifying trends, understanding the financial structure, and making informed decisions based on the relative importance of each item.