THE COMMON FORM BALANCE SHEET
As the technology companies’ huge 2001 write-offs demonstrate, deterioration in a company’s financial position may catch investors by surprise because it occurs gradually and is reported suddenly.
It is also possible for an increase in financial risk to sneak up on analysts even though it is reported as it occurs. Many companies alter the mix of their assets, or their methods of financing them, in a gradual fashion. To spot these subtle, yet frequently significant, changes, it is helpful to prepare a common form balance sheet.| EXHIBIT 2.3 Lowe’s Companies Inc. Consolidated Balance Sheet in Thousands | ||
|
| January 28, 2000 | Percent Total |
| Assets Current Assets: Cash and cash equivalents | $ 491,122 | 5.4 |
| Short-term investments | 77,670 | 0.9 |
| Accounts receivable—net | 147,901 | lang=EN-US style='font-size:8.5pt;font-family:"Cambria",serif'>1.6 |
| Merchandise inventory | 2,812,361 | 31.2 |
| Deferred income taxes | 53,145 | 0.6 |
| Other current assets | 127,342 | 1.4 |
| Total current assets | 3,709,541 | 41.2 |
| Property, less accumulated depreciation | 5,177,222 | 57.5 |
| Long-term investments | 31,114 | 0.3 |
| Other assets | 94,446 | 1.0 |
| Total assets | $9,012,323 | 100.0 |
| lang=EN-US style='font-size:8.5pt; line-height:105%;font-family:"Cambria",serif'>Liabilities and Shareholders’ Equity Current Liabilities: Short-term borrowings | $ 92,475 | 1.0 |
| Current maturities of long-term debt | 59,908 | 0.7 |
| Accounts payable | 1,566,946 | 17.4 |
| Employee retirement plans | 101,946 | 1.1 |
| Accrued salaries and wages | 164,003 | 1.8 |
| Other current liabilities | 400,676 | 4.5 |
| Total current liabilities | 2,385,954 | 26.5 |
| Long-term debt, excluding current maturities | 1,726,579 | 19.2 |
| Deferred income taxes | 199,824 | 2.2 |
| Other long-term liabilities | 4,495 | — |
| Total liabilities | $4,316,852 | 47.9 |
Shareholders’ Equity: Preferred stock—$5 par value, none issued
Common stock—$.50 Par value; issued and outstanding
| January 28, 2000 382,359 |
|
|
| January 29, 1999 374,388 | $ 191,179 | 2.1 |
| Capital in excess of par value | 1,755,616 | 19.5 |
| Retained earnings | 2,761,964 | 30.6 |
| Unearned compensation-restricted stock awards | (12,868) | 0cm.5pt 0cm.5pt;height:10.8pt'> |
| Accumulated other comprehensive income (loss) | (420) | N.M. |
| Total shareholders’ equity | 4,695,471 | 52.1 |
| Total liabilities and shareholders’ equity | $9,012,323 | 100.0 |
Calculations are subject to rounding error.
Source: Lowe’s Companies Inc., Form 10-K405, April 26, 2000.
Also known as the percentage balance sheet, the common form balance sheet converts each asset into a percentage of total assets and each liability or component of equity into a percentage of total liabilities and shareholders’ equity. Exhibit 2.3 applies this technique to the 2000 balance sheet of Lowe’s Companies, Inc., a home improvement retailer.
The analyst can view a company’s common form balance sheets over several quarters to check, for example, whether inventory is increasing significantly as a percentage of total assets.
An increase of that sort might signal involuntary inventory buildup resulting from an unanticipated slowdown in sales. Similarly, a rise in accounts receivable as a percentage of assets may point to increasing reliance on the extension of credit to generate sales or a problem in collecting on credit previously extended. Over a longer period, a rise in the percentage of assets represented by property, plant, and equipment can signal that a company’s business is becoming more capitalintensive. By implication, fixed costs are probably rising as a percentage of revenues, making the company’s earnings more volatile.
More on the topic THE COMMON FORM BALANCE SHEET:
- IMPLICATIONS FOR TRAINING AND PRACTICE
- NUMERICAL PROBLEMS
- The Surprise Effect
- THE LONG-RUN EVOLUTION OF WEALTH CONCENTRATION
- Conclusion
- Article 15.7 Rebound in sales of risky assets raises fears over quantitative easing's legacy
- Theory of the firm
- UNDERSTANDING PROBLEM SOLVING AND DECISION MAKING IN CONFLICT SITUATIONS
- 12 Supply of Money
- Total loss-absorbing capacity (TLAC) considers the scope for a bank to absorb losses.