Combined Common Size and Base Year Analysis

The trend analysis we have been discussing can be combined with the common-size analysis discussed earlier. The reason for doing this is that as total assets grow, most of the other accounts must grow as well. By first forming the common-size statements, we eliminate the effect of this overall growth.

For example, looking at Table 3.7, we see that Prufrock's accounts receivable were $165, or 4.9 percent of total assets, in 2001. In 2002, they had risen to $188, which was 5.2 percent of total assets. If we do our analysis in terms of dollars, then the 2002 figure would be $188/165 = 1.14, representing a 14 percent increase in receivables. However, if we work with the common-size statements, then the 2002 figure would be 5.2%/4.9% = 1.06. This tells us accounts receivable, as a percentage of total assets, grew by 6 percent. Roughly speaking, what we see is that of the 14 percent total increase, about 8 percent (14% - 6%) is attributable simply to growth in total assets.

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