Problem

Common-Size and Common‒Base Year Financial Statements In addition to common-size financial...

Common-Size and Common‒Base Year Financial Statements In addition to common-size financial statements, common-base year financial statements are often used. Common‒base year financial statements are constructed by dividing the current year account value by the base year account value. Thus, the result shows the growth rate in the account. Using the following financial statements, construct the common-size balance sheet and common-base year balance sheet for the company. Use 2009 as the base year.

JARROW CORPORATION 2009 and 2010 Balance Sheets
Assets			Liabilities and Owners’ Equity
	2009	2010		2009	2010
Current assets Cash	$ 8,436	$ 10,157	Current liabilities
			Accounts payable	$ 43,050	$ 46,821
Accounts receivable	21,530	23,406	Notes payable	18,384	17,382
Inventory	38,760	42,650	Total	$ 61,434	$ 64,203
Total	$ 68,726	$ 76,213	Long-term debt	$ 25,000	$ 32,000
Fixed assets			Owners’ equity
Net plant and equipment	$226,706	$248,306	Common stock and paid-in surplus	$ 40,000	$ 40,000
			Accumulated retained	168,998	188,316
			earnings
			Total	$208,998	$228,316
Total assets	$295,432	$324,519	Total liabilities and owners’ equity	$295,432	$324,519

Use the following information for Problems 19, 20, and 22:

The discussion of EFN in the chapter implicitly assumed that the company was operating at full capacity. Often, this is not the case. For example, assume that Rosengarten was operating at 90 percent capacity. Full-capacity sales would be $1,000/.90 = $1,111. The balance sheet shows $1,800 in fixed assets. The capital intensity ratio for the company is

Capital intensity ratio = Fixedassets/Full-capacitysales = $1,800/$1,111 = .62

This means that Rosengarten needs $1.62 in fixed assets for every dollar in sales when it reaches full capacity. At the projected sales level of $1,250, it needs $1,250 × 1.62 = $2,025 in fixed assets, which is $225 lower than our projection of $2,250 in fixed assets. So, EFN is only $565 - 225 = $340.