To start making comparisons one obvious thing we

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Unformatted text preview: ency difference. To start making comparisons, one obvious thing we might try to do is to somehow standardize the financial statements. One very common and useful way of doing this is to work with percentages instead of total dollars. The resulting financial statements are called common-size statements. We consider these next. Common-Size Balance Sheets For easy reference, Prufrock Corporation’s 2007 and 2008 balance sheets are provided in Table 3.1. Using these, we construct common-size balance sheets by expressing each item as a percentage of total assets. Prufrock’s 2007 and 2008 common-size balance sheets are shown in Table 3.2. Notice that some of the totals don’t check exactly because of rounding errors. Also notice that the total change has to be zero since the beginning and ending numbers must add up to 100 percent. In this form, financial statements are relatively easy to read and compare. For example, just looking at the two balance sheets for Prufrock, we see that current assets were 19.7 percent of total assets in 2008, up from 19.1 percent in 2007. Current liabilities declined from 16.0 percent to 15.1 percent of total liabilities and equity over that same time. Similarly, total equity rose from 68.1 percent of total liabilities and equity to 72.2 percent. T ABL E 3 .1 P R U FR O C K C O R P O R AT I O N B a l a n c e S h e e t s a s o f D e c e m b e r 31, 2007 a n d 2008 ( $ i n m i l l i o n s) 2007 Assets Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment Total assets Liabilities and Owners’ Equity Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity 2008 $ 84 165 393 $ 642 $2,731 $3,373 98 188 422 $ 708 $2,880 $3,588 $ $ 312 231 $ 543 $ 531 $ 500 1,799 $2,299 $3,373 $ 344 196 $ 540 $ 457 $ 550 2,041 $2,591 $3,588 46 PART 1 Overview ros82361_ch03.indd 46 5/27/08 8:22:22 PM Confirming Pages TA B LE 3.2 P RUFR O C K C O R P O R AT I O N Co mmo n - S i ze B a l a n c e S h e e t s De c e m b e r 31, 2007 a n d 2008 2007 Assets Current assets Cash Accounts receivable Inventory Total Fixed assets Net plant and equipment Total assets Liabilities and Owners’ Equity Current liabilities Accounts payable Notes payable Total Long-term debt Owners’ equity Common stock and paid-in surplus Retained earnings Total Total liabilities and owners’ equity 2008 Change 2.5% 4.9 11.7 19.1 80.9 100.0% 2.7% 5.2 11.8 19.7 80.3 100.0% .2% .3 .1 .6 .6 .0% 9.2% 6.8 16.0 15.7 14.8 53.3 68.1 100.0% 9.6% 5.5 15.1 12.7 15.3 56.9 72.2 100.0% .4% 1.3 .9 3.0 .5 3.6 4.1 .0% Overall, Prufrock’s liquidity, as measured by current assets compared to current liabilities, increased over the year. Simultaneously, Prufrock’s indebtedness diminished as a percentage of total assets. We might be tempted to conclude that the balance sheet has grown “stronger.” Common-Size Income Statements A useful way of standardizing the...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.

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