# Question

In addition to common- size financial statements, common– base year financial statements are often used. Common–base year financial 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 financial statements, construct the common-size balance sheet and common–base year balance sheet for the company. Use 2011 as the base year.

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 fixed 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 fixed assets for every dollar in sales when it reaches full capacity. At the projected sales level of $ 1,250, it needs $ 1,250 3 1.62 = $ 2,025 in fixed assets, which is $ 225 lower than our projection of $ 2,250 in fixed assets. So, EFN is only $ 565 – 225 = $340.

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 fixed 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 fixed assets for every dollar in sales when it reaches full capacity. At the projected sales level of $ 1,250, it needs $ 1,250 3 1.62 = $ 2,025 in fixed assets, which is $ 225 lower than our projection of $ 2,250 in fixed assets. So, EFN is only $ 565 – 225 = $340.

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