Common-Size and Common-Base Year Financial Statements In addition to common-size fi nancial statements, common–base year fi nancial statements are often used. Common–base year fi nancial 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 fi nancial statements, construct the common-size balance sheet and common–base year balance sheet for the company. Use 2006 as the base year.

JARROW CORPORATION 2006 and 2007 Balance Sheets Assets 2006 2007 Current assets Cash $ 10,168 $ 10,683 Accounts receivable 27,145 28,613 Inventory 59,324 64,853 Total $ 96,637 $104,149 Fixed assets Net plant and $304,165 $347,168 equipment Total assets $400,802 $451,317 Liabilities and Owners' Equity 2006 2007 Current liabilities Accounts payable $ 73,185 $ 59,309 Notes payable 39,125 48,168 Total $112,310 $107,477 Long-term debt $ 50,000 $ 62,000 Owners’ equity Common stock and paid-in surplus $ 80,000 $ 80,000 Retained earnings 158,492 201,840 Total $238,492 $281,840 Total liabilities and owners’ equity $400,802 $451,317 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 fi xed assets. The capital intensity ratio for the company is Capital intensity ratio  Fixed assets/Full-capacity sales  $1,800/$1,111  1.62 This means that Rosengarten needs $1.62 in fi xed 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 fi xed assets, which is $225 lower than our projection of $2,250 in fi xed assets. So, EFN is only $565 – 225
$340. LO.1