problem, however. It’s almost impossible to directly compare the financial statements
for two companies because of differences in size.
For example, Ford and GM are obviously serious rivals in the auto market, but the
two companies are not the same size, so it is difficult to compare them directly. For that
matter, it’s difficult to even compare financial statements from different points in time for
the same company if the company’s size has changed. The size problem is compounded
if we try to compare GM and, say, Toyota. If Toyota’s financial statements are denomi-
nated in yen, then we have a size
a currency 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
. We consider these next.
Common-Size Balance Sheets
For easy reference, Prufrock Corporation’s 2007 and 2008 balance sheets are provided in
. 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
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 exam-
ple, 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 de-
clined 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.
Balance Sheets as of December 31, 2007 and 2008
($ in millions)
Net plant and equipment
Liabilities and Owners’ Equity
Common stock and paid-in surplus
Total liabilities and owners’ equity