Chapter 5, Problem 1MC

To determine

Draft a common size income statement and balance sheet for C-C.

Explanation of Solution

Vertical analysis:

The comparison of an item of a financial statement against the total amount of the same financial statement, to determine the relation between the two items, is referred to as vertical analysis.

The percentage in the statement is calculated by:

$\text{Percentage}=\left(\frac{\text{Financial statement item}}{\text{Base amount}}\times 100\right)$

Common size income statement is as follows:

C-C Company and Subsidiaries
Common size income statement
For the year ended December 31st
Particulars	2017		2016
	Amount ($)	%	Amount ($)	%
Net operating revenues	35,410	100%	41,863	100%
Cost of goods sold	(13,256)	37.4%	(16,465)	39.3%
Gross profit	22,154	62.6%	25,398	60.7%
Selling and administrative expense	(12,496)	35.3%	(15,262)	36.5%
Other operating charges	(2,157)	6.1%	(1,510)	3.6%
Operating income	7,501	21.2%	8,626	20.6%
Interest income	677	1.9%	642	1.5%
Interest expense	841	2.4%	733	1.8%
Equity income (Loss) – Net	1,071	3.0%	835	2.0%
Other income (Loss) – Net	(1,666)	(4.7%)	(1,234)	(2.9%)
Income from continuing operations before income taxes	6,742	19.0%	8,136	19.4%
Income taxes from continuing operations	(5,560)	15.7%	(1,586)	3.8%
Net income from continuing operations	1,182	3.3%	6,550	15.6%
Income from discontinued operations	101	0.3%	-	0.0%
Consolidated net income	1,283	3.6%	6,550	15.6%

Common size balance sheet is as follows:

C-C Company and Subsidiaries
Common size balance sheet
For the year ended December 31st
Particulars	2017		2016
	Amount ($)	%	Amount ($)	%
Assets
Cash and cash equivalents	6,006	6.8%	8,555	9.8%
Short term investments and marketable securities	14,669	16.7%	13,646	15.6%
Trade accounts receivable	3,667	4.2%	3,856	4.4%
Inventories	2,655	3.0%	2,675	3.1%
Prepaid expenses and other current assets	9,548	10.9%	5,278	6.0%
Total current assets	36,545	41.6%	34,010	39.0%
Equity method investments	20,856	23.7%	16,260	18.6%
Other investments	1,096	1.2%	989	1.1%
Property, plant and equipment – Net	8,203	9.3%	10,635	12.2%
Goodwill and other intangible assets	16,636	18.9%	21,128	24.2%
Other assets	4,560	5.2%	4,248	4.9%
Total assets	87,896	100%	87,270	100%
Liabilities and equity
Accounts payable and accrued expenses	8,748	10%	9,490	10.9%
Loans and notes payable	13,205	15.0%	12,498	14.3%
Current maturities of long term debt	3,298	3.8%	3,527	4.0%
Accrued income taxes	410	0.5%	307	0.4%
Other current liabilities	1,533	1.7%	710	0.8%
Total current liabilities	27,194	30.9%	26,532	30.4%
Long term debt	31,182	35.5%	29,684	34.0%
Other liabilities	8,021	9.1%	4,081	4.7%
Deferred income taxes	2,522	2.9%	3,753	4.3%
Total liabilities	68,919	78.4%	64,050	73.4%
Total equities	18,977	21.6%	23,220	26.6%
Total liabilities and equities	87,896	100%	87,270	100%

Interpretation:

As per the income statement of C-C Company and subsidiaries for the year 2016 and 2017, the consolidated net income for both the periods vary significantly. The common size percentage of net income in terms of net operating revenues for 2016 is 15.6% whereas the same metric for 2017 is 3.6%. Income tax from continuing operations has increased from $1.586 in 2016 to $5.560 in 2017. As a result, the net income from continuing operations had a significant impact in 2017.

As per the balance sheet of C-C Company and subsidiaries for the year 2016 and 2017, equity has decreased from $23,220 in 2016 to $18,977 in 2017. It is desirable for profitable business to grow their equity annually. The total assets and liabilities of the company have also increased in 2017.