Common-Size Balance Sheets and Horizontal Analysis Comparative balance sheets for Farinet Company for the past two years are as follows:

December 31 2010 2009 Cash $ 16,000 $ 20,000 Accounts receivable 40,000 30,000 Inventory 30,000 50,000 Prepaid rent 18,000 12,000 Total current assets $104,000 $ 112,000 Land $150,000 $150,000 Plant and equipment 800,000 600,000 Accumulated depreciation (130,000) (60,000)

Total long-term assets $820,000 $690,000 Total assets $924,000 $802,000 Accounts payable $ 24,000 $ 20,000 Income taxes payable 6,000 10,000 Short-term notes payable 70,000 50,000 Total current liabilities $100,000 $ 80,000 Bonds payable $150,000 $200,000 Common stock $400,000 $300,000 Retained earnings 274,000 222,000 Total stockholders’ equity $674,000 $522,000 Total liabilities and stockholders’ equity $924,000 $802,000 Required 1. Using the format in Example 13-4, prepare common-size comparative balance sheets for the two years for Farinet Company.

2. What observations can you make about changes in the relative composition of Farinet’s accounts from the common-size balance sheets? List at least fi ve observations.

3. Using the format in Example 13-1, prepare comparative balance sheets for Farinet Company, including columns for the dollars and for the percentage increase or decrease in each item on the statement.

4. Identify the fi ve items on the balance sheet that experienced the largest change from one year to the next. For each of these items, explain where you would look to fi nd additional information about the change.

AppendixLO1