CFA Level IFinancial Statement AnalysisMedium
A company's balance sheet shows total assets of $2,000,000, including cash $200,000, accounts receivable $300,000, inventory $300,000, and net property, plant, and equipment $1,200,000. On a common-size balance sheet, what percentage of total assets does inventory represent?
- A60%
- B10%
- C15%
- D20%
Show answer & explanationAnswer & explanation
Correct answer: C. 15%
A common-size balance sheet expresses each item as a percentage of total assets. Inventory percentage = $300,000 / $2,000,000 = 15%.
Why the other options are wrong
- A. This matches PP&E's percentage, not inventory's.
- B. This would correspond to $200,000, matching cash, not inventory.
- D. This overstates the percentage by using an incorrect denominator.
Common-Size Balance Sheet
A common-size balance sheet presents each line item as a percentage of total assets, enabling comparison across companies of different sizes.
- Each asset item ÷ total assets
- Each liability/equity item ÷ total assets
- Facilitates cross-sectional and trend analysis
Memory trick: Divide every line by total assets to see the size-free picture.