Chapter 12, Problem 76E

To determine

(a)

Introduction:

Under vertical analysis, each item of financial statement is shown as a percent of the highest amount available on the same statement.

To prepare:

Common size financial statements for vertical analysis.

Answer to Problem 76E

COMMON SIZE INCOME STATEMENT

Particulars	2019	2018	2017
Net Sales	100%	100%	100%
(-) Cost of Goods Sold	72.96%	71.33%	70.83%
Gross Margin	27.04%	28.67%	29.17%
(-) General & administrative expenses	17.39%	17.31%	17.58%
(+) Special & nonrecurring items	0.04%	0	0
Operating Income	9.69%	11.36%	11.59%
(-) Interest expense	0.89%	0.90%	1.04%
(+) Other Income	0.10%	0.15%	0.19%
(+) Gain on Sale of Investments	0	0.13%	0
Income for income taxes	8.91%	10.74%	10.74%
(-) Provision for income taxes	3.51%	4.18%	4.18%
Net Income	5.40%	6.56%	6.56%

COMMON SIZE BALANCE SHEET

ASSETS	Dec 31, 2019	Dec 31, 2018
Current Assets:
Cash and equivalents	7.75%	1.07%
Accounts Receivable	25.56%	21.77%
Inventories	17.74%	20.89%
Other	2.65%	2.65%
Total Current Assets	53.70%	46.38%
Property and equipment, net	40.30%	47.16%
Other assets	6.00%	6.46%
Total Assets	100%	100%
LIABILITIES	Dec 31, 2019	Dec 31, 2018
Current Liabilities:
Accounts Payable	6.05%	8.04%
Accrued Expenses	8.41%	7.13%
Other current liabilities	0.38%	0
Income taxes	2.26%	3.57%
Total Current Liabilities	17.12%	18.74%
Long term debt	15.72%	14.08%
Deferred Income taxes	6.65%	7.15%
Other long term liabilities	1.48%	1.08%
Total Liabilities	40.96%	41.05%
Stockholders’ Equity
Preferred Stock	2.42%	2.60%
Common Stock	2.17%	2.33%
Additional Paid in capital-common stock	3.12%	3.32%
Retained Earnings	57.97%	55.55%
Less: Treasury Stock-at cost	6.64%	4.85%
Total Stockholders’ Equity	59.04%	58.95%
Total Liabilities and Stockholders’ Equity	100%	100%

Explanation of Solution

COMMON SIZE INCOME STATEMENT

Particulars	2019	2018	2017
Net Sales	$\frac{\$7,245,088}{\$7,245,088}\times 100$ = 100%	$\frac{\$6,944,296}{\$6,944,296}\times 100$ = 100%	$\frac{\$6,149,218}{\$6,149,218}\times 100$ = 100%
Cost of Goods Sold	$\frac{\$5,286,253}{\$7,245,088}\times 100$ = 72.96%	$\frac{\$4,953,556}{\$6,944,296}\times 100$ = 71.33%	$\frac{\$4,355,675}{\$6,149,218}\times 100$ = 70.83%
Gross Margin	$\frac{\$1,958,835}{\$7,245,088}\times 100$ = 27.04	$\frac{\$1,990,740}{\$6,944,296}\times 100$ = 28.67%	$\frac{\$1,793,543}{\$6,149,218}\times 100$ = 29.17%
General and administrative expenses	$\frac{\$1,259,896}{\$7,245,088}\times 100$ = 17.39%	$\frac{\$1,202,042}{\$6,944,296}\times 100$ = 17.31%	$\frac{\$1,080,843}{\$6,149,218}\times 100$ = 17.58%
Special and nonrecurring items	$\frac{\$2,617}{\$7,245,088}\times 100$ = 0.04%	$\frac{\$0}{\$6,944,296}\times 100$ = 0	$\frac{\$0}{\$6,149,218}\times 100$ = 0
Operating Income	$\frac{\$701,556}{\$7,245,088}\times 100$ = 9.69%	$\frac{\$788,698}{\$6,944,296}\times 100$ = 11.36%	$\frac{\$712,700}{\$6,149,218}\times 100$ = 11.59%
Interest expense	$\frac{\$63,685}{\$7,245,088}\times 100$ = 0.89%	$\frac{\$62,398}{\$6,944,296}\times 100$ = 0.90%	$\frac{\$63,927}{\$6,149,218}\times 100$ = 1.04%
Other Income	$\frac{\$7,308}{\$7,245,088}\times 100$ = 0.10%	$\frac{\$10,080}{\$6,944,296}\times 100$ = 0.15%	$\frac{\$11,529}{\$6,149,218}\times 100$ = 0.19%
Gain on Sale of Investments	$\frac{\$0}{\$7,245,088}\times 100$ = 0	$\frac{\$9,117}{\$6,944,296}\times 100$ = 0.13%	$\frac{\$0}{\$6,149,218}\times 100$ = 0
Income for income taxes	$\frac{\$645,179}{\$7,245,088}\times 100$ = 8.91%	$\frac{\$745,497}{\$6,944,296}\times 100$ = 10.74%	$\frac{\$660,302}{\$6,149,218}\times 100$ = 10.74%
Provision for income taxes	$\frac{\$254,000}{\$7,245,088}\times 100$ = 3.51%	$\frac{\$290,000}{\$6,944,296}\times 100$ = 4.18%	$\frac{\$257,000}{\$6,149,218}\times 100$ = 4.18%
Net Income	$\frac{\$391,179}{\$7,245,088}\times 100$ = 5.40%	$\frac{\$455,497}{\$6,944,296}\times 100$ = 6.56%	$\frac{\$403,302}{\$6,149,218}\times 100$ = 6.56%

COMMON SIZE BALANCE SHEET

ASSETS	Dec 31, 2019	Dec 31, 2018
Current Assets:
Cash and equivalents	$\frac{\$320,558}{\$4,135,105}\times 100$ = 7.75%	$\frac{\$41,235}{\$3,846,450}\times 100$ = 1.07%
Accounts Receivable	$\frac{\$1,056,911}{\$4,135,105}\times 100$ = 25.56%	$\frac{\$837,377}{\$3,846,450}\times 100$ = 21.77%
Inventories	$\frac{\$733,700}{\$4,135,105}\times 100$ = 17.74%	$\frac{\$803,707}{\$3,846,450}\times 100$ = 20.89%
Other	$\frac{\$109,456}{\$4,135,105}\times 100$ = 2.65%	$\frac{\$101,811}{\$3,846,450}\times 100$ = 2.65%
Total Current Assets	$\frac{\$2,220,625}{\$4,135,105}\times 100$ = 53.70%	$\frac{\$1,784,130}{\$3,846,450}\times 100$ = 46.38%
Property and equipment, net	$\frac{\$1,666,588}{\$4,135,105}\times 100$ = 40.30%	$\frac{\$1,813,948}{\$3,846,450}\times 100$ = 47.16%
Other assets	$\frac{\$247,892}{\$4,135,105}\times 100$ = 6.00%	$\frac{\$248,372}{\$3,846,450}\times 100$ = 6.46%
Total Assets	$\frac{\$4,135,105}{\$4,135,105}\times 100$ = 100%	$\frac{\$3,846,450}{\$3,846,450}\times 100$ = 100%
LIABILITIES	Dec 31, 2019	Dec 31, 2018
Current Liabilities:
Accounts Payable	$\frac{\$250,363}{\$4,135,105}\times 100$ = 6.05%	$\frac{\$309,092}{\$3,846,450}\times 100$ = 8.04%
Accrued Expenses	$\frac{\$347,892}{\$4,135,105}\times 100$ = 8.41%	$\frac{\$274,220}{\$3,846,450}\times 100$ = 7.13%
Other current liabilities	$\frac{\$15,700}{\$4,135,105}\times 100$ = 0.38%	$\frac{\$0}{\$3,846,450}\times 100$ = 0
Income taxes	$\frac{\$93,489}{\$4,135,105}\times 100$ = 2.26%	$\frac{\$137,466}{\$3,846,450}\times 100$ = 3.57%
Total Current Liabilities	$\frac{\$707,444}{\$4,135,105}\times 100$ = 17.12%	$\frac{\$720,778}{\$3,846,450}\times 100$ = 18.74%
Long term debt	$\frac{\$650,000}{\$4,135,105}\times 100$ = 15.72%	$\frac{\$541,639}{\$3,846,450}\times 100$ = 14.08%
Deferred Income taxes	$\frac{\$275,101}{\$4,135,105}\times 100$ = 6.65%	$\frac{\$274,844}{\$3,846,450}\times 100$ = 7.15%
Other long term liabilities	$\frac{\$61,267}{\$4,135,105}\times 100$ = 1.48%	$\frac{\$41,572}{\$3,846,450}\times 100$ = 1.08%
Total Liabilities	$\frac{\$1,693,812}{\$4,135,105}\times 100$ = 40.96%	$\frac{\$1,578,833}{\$3,846,450}\times 100$ = 41.05%
Stockholders’ Equity
Preferred Stock	$\frac{\$100,000}{\$4,135,105}\times 100$ = 2.42%	$\frac{\$100,000}{\$3,846,450}\times 100$ = 2.60%
Common Stock	$\frac{\$89,727}{\$4,135,105}\times 100$ = 2.17%	$\frac{\$89,727}{\$3,846,450}\times 100$ = 2.33%
Additional Paid in capital-common stock	$\frac{\$128,906}{\$4,135,105}\times 100$ = 3.12%	$\frac{\$127,776}{\$3,846,450}\times 100$ = 3.32%
Retained Earnings	$\frac{\$2,397,112}{\$4,135,105}\times 100$ = 57.97%	$\frac{\$2,136,794}{\$3,846,450}\times 100$ = 55.55%
Less: Treasury Stock-at cost	$\frac{\$274,452}{\$4,135,105}\times 100$ = 6.64%	$\frac{\$186,680}{\$3,846,450}\times 100$ = 4.85%
Total Stockholders’ Equity	$\frac{\$2,441,293}{\$4,135,105}\times 100$ = 59.04%	$\frac{\$2,267,617}{\$3,846,450}\times 100$ = 58.95%
Total Liabilities and Stockholders’ Equity	$\frac{\$4,135,105}{\$4,135,105}\times 100$ = 100%	$\frac{\$3,846,450}{\$3,846,450}\times 100$ = 100%

To determine

(b)

Introduction:

When a company holds 50% or more of the common stock of another company then both the companies are treated as a single entity. In such a case, consolidated statements are prepared.

To compare:

The growth in gross margin and sales between year 2017 and 2018, 2018 and 2019.

Answer to Problem 76E

No, gross margin did not grew as much as sales between 2018 and 2018, and 2018 and 2019.

Explanation of Solution

Gross Margin:

2019 = $1,958,835

2018 = $1,990,740

2017 = $1,793,543

Change in gross margin between 2018 and 2019 = $1,958,835 - $1,990,740

Change in gross margin between 2018 and 2019 = ($31,905)

Change in gross margin between 2018 and 2019 = $\frac{\$31,905}{\$1,990,740}\times 100=1.60\%$

Change in gross margin between 2017 and 2018 = $1,990,740 - $1,793,543

Change in gross margin between 2017 and 2018 = $197,197

Change in gross margin between 2017 and 2018 = $\frac{\$197,197}{\$1,793,543}\times 100=10.99\%$

Sales:

2019 = $7,245,088

2018 = $6,944,296

2017 = $6,149,218

Change in sales between 2018 and 2019 = $7,245,088 - $6,944,296

Change in sales between 2018 and 2019 = $300,792

Change in sales between 2018 and 2019 = $\frac{\$300,792}{\$6,944,296}\times 100=4.33\%$

Change in sales between 2017 and 2018 = $6,944,296 - $6,149,218

Change in sales between 2017 and 2018 = $795,078

Change in sales between 2017 and 2018 = $\frac{\$795,078}{\$6,149,218}\times 100=12.93\%$.

To determine

(c)

Introduction:

When a company holds 50% or more of the common stock of another company then both the companies are treated as a single entity. In such a case, consolidated statements are prepared.

To compare:

Relative proportion of assets between 2018 and 2019.

Answer to Problem 76E

Yes, the relative proportion of current assets to total assets changed between 2018 and 2019 as the value of current assets increased in 2019 by more than the value of total assets.

Explanation of Solution

Total Current Assets:

2019 = $2,220,625

2018 = $1,784,130

Total Assets:

2019 = $4,135,105

2018 = $3,846,450

Relative proportion of assets:

2019 = $\frac{\$2,220,625}{\$4,135,105}\times 100$ = 53.70%

2018 = $\frac{\$1,784,130}{\$3,846,450}\times 100$ = 46.38%.

To determine

(d)

Introduction:

When a company holds 50% or more of the common stock of another company then both the companies are treated as a single entity. In such a case, consolidated statements are prepared.

To compare:

Relative proportion of liabilities and equity between 2018 and 2019.

Answer to Problem 76E

Yes, the relative proportion of debt and equity changed between 2018 and 2019 as the value of debt increased in 2019 was less than the increase in value of equity.

Explanation of Solution

Total Liabilities:

2019 = $1,693,812

2018 = $1,578,833

Total Stockholders’ Equity:

2019 = $2,441,293

2018 = $2,267,617

Relative Proportion of Liabilities and Equity:

2019 = $\frac{\$1,693,812}{\$2,441,293}\times 100=69.38\%$

2018 = $\frac{\$1,578,833}{\$2,267,617}\times 100=69.63\%$.

To determine

(d)

Introduction:

When a company holds 50% or more of the common stock of another company then both the companies are treated as a single entity. In such a case, consolidated statements are prepared.

The source of finance for the increased value of asset.

Answer to Problem 76E

The 60.17% of the increased value of asset was financed by Liabilities whereas remaining 39.83% were financed by equity.

Explanation of Solution

Total Assets:

2019 = $4,135,105

2018 = $3,846,450

Change in Total Assets = $4,135,105 - $3,846,450

Change in Total Assets = $288,655

Total Liabilities:

2019 = $1,693,812

2018 = $1,578,833

Change in Total Liabilities = $1,693,812 - $1,578,833

Change in Total Liabilities = $114,979

Total Stockholders’ Equity:

2019 = $2,441,293

2018 = $2,267,617

Change in Total Liabilities = $2,441,293 - $2,267,617

Change in Total Liabilities = $173,676

Part of assets financed by:

Liabilities = $\frac{\$173,676}{\$288,655}\times 100=60.17\%$

Equity = $\frac{\$114,979}{\$288,655}\times 100=39.83\%$.