Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionII. Financial Statements
and Long−Term Financial
Planning- Working with Financial
Statements
(^92) © The McGraw−Hill
Companies, 2002
sold. It would be interesting to compute the same percentage for Prufrock’s main com-
petitors to see how Prufrock stacks up in terms of cost control.
Common-Size Statements of Cash Flows Although we have not presented it here,
it is also possible and useful to prepare a common-size statement of cash flows. Unfor-
tunately, with the current statement of cash flows, there is no obvious denominator such
as total assets or total sales. However, if the information is arranged in a way similar to
that in Table 3.4, then each item can be expressed as a percentage of total sources (or to-
tal uses). The results can then be interpreted as the percentage of total sources of cash
supplied or as the percentage of total uses of cash for a particular item.
Common–Base Year Financial Statements: Trend Analysis
Imagine we were given balance sheets for the last 10 years for some company and we
were trying to investigate trends in the firm’s pattern of operations. Does the firm use
more or less debt? Has the firm grown more or less liquid? A useful way of standardiz-
ing financial statements in this case is to choose a base year and then express each item
60 PART TWO Financial Statements and Long-Term Financial Planning
TABLE 3.5 PRUFROCK CORPORATION
Common-Size Balance Sheets
December 31, 2001 and 2002
2001 2002 Change
Assets
Current assets
Cash 2.5% 2.7% .2%
Accounts receivable 4.9 5.2 .3
Inventory 11.7 11.8 .1
Total 19.1 19.7 .6
Fixed assets
Net plant and equipment 80.9 80.3 .6
Total assets 100.0% 100.0% 0.0
Liabilities and Owners’ Equity
Current liabilities
Accounts payable 9.2% 9.6% .4%
Notes payable 6.8 5.5 1.3
Total 16.0 15.1 .9
Long-term debt 15.7 12.7 3.0
Owners’ equity
Common stock and
paid-in surplus 14.8 15.3 .5
Retained earnings 53.3 56.9 3.6
Total 68.1 72.2 4.1
Total liabilities and
owners’ equity 100.0% 100.0% 0.0