Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

II. Financial Statements

and Long−Term Financial

Planning

3. Working with Financial
   Statements

© The McGraw−Hill^117

Companies, 2002

The current ratio went from $1,072/1,922 .56 to $853/1,725 .49, so the

firm’s liquidity appears to have declined somewhat. Overall, however, the

amount of cash on hand increased by $5.

3.2 We’ve calculated the common-size income statement below. Remember that we
simply divide each item by total sales.

CHAPTER 3 Working with Financial Statements 85

PHILIPPE CORPORATION

Balance Sheets as of December 31, 2001 and 2002

($ in millions)

Source or

2001 2002 Change Use of Cash

Assets

Current assets

Cash $ 210 $ 215 $5

Accounts receivable 355 310 
 45 Source

Inventory 507 328 
 179 Source

Total $1,072 $ 853 
$219

Fixed assets

Net plant and equipment $6,085 $6,527 $442 Use

Total assets $7,157 $7,380 $223

Liabilities and Owners’ Equity

Current liabilities

Accounts payable $ 207 $ 298 $ 91 Source

Notes payable 1,715 1,427 
 288 Use

Total $1,922 $1,725 
$197

Long-term debt $1,987 $2,308 $321 Source

Owners’ equity

Common stock and paid-in surplus $1,000 $1,000 $0 —

Retained earnings 2,248 2,347  99 Source

Total $3,248 $3,347 $99

Total liabilities and owners’ equity $7,157 $7,380 $223

PHILIPPE CORPORATION

2002 Common-Size Income Statement

Sales 100.0%

Cost of goods sold 68.6

Depreciation 13.6

Earnings before interest and taxes 17.8

Interest paid 12.3

Taxable income 5.5

Taxes (34%) 1.9

Net income 3.6%

Dividends 1.2%

Addition to retained earnings 2.4%