Finance 3403 Chapter 3 - Chapter 3 WORKING WITH FINANCIAL STATEMENTS 3.2 Standardized Financial Statements Standardized statements allow users to

Finance 3403 Chapter 3 - Chapter 3 WORKING WITH FINANCIAL...

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Chapter 3WORKING WITH FINANCIAL STATEMENTS3.2 Standardized Financial StatementsStandardized statements allow users to compare companies of different sizes. They also allow users to compare a particular company as it grows through time.A.Common-Size StatementsUseful in comparison of firms of unequal size or to compare a company through time as it grows.Common-Size Balance Sheet – express each account as a percent of total assetsCommon-Size Income Statement – express each item as a percent of sales.ACommon-Base Year Financial Statements: Trend AnalysisSelect a base year and then express each item or account as a percent of the base-year value of that item. This is useful for picking up trends through time..BCombined Common-Size and Base-Year AnalysisExpress each item in base year as a percent of either total assets or sales. Then, compare each subsequent year’s common-size percent to the base-year percent (abstracts from the growth in assets and sales).3.3Ratio Analysis: 5 Categories of Financial Ratios:1. Short-term solvency, or liquidity, ratios: The ability to pay bills in the short-run

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