FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
6th Edition
ISBN: 9781618533111
Author: DYCKMAN
Publisher: Cambridge Business Publishers
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Chapter 5, Problem 1MC
To determine

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

Expert Solution & Answer
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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:

Percentage=Financial statement itemBase amount×100

Common size income statement is as follows:

C-C Company and Subsidiaries
Common size income statement
For the year ended December 31st
Particulars20172016
Amount ($)%Amount ($)%
Net operating revenues35,410100%41,863100%
Cost of goods sold(13,256)37.4%(16,465)39.3%
Gross profit22,15462.6%25,39860.7%
Selling and administrative expense(12,496)35.3%(15,262)36.5%
Other operating charges(2,157)6.1%(1,510)3.6%
Operating income7,50121.2%8,62620.6%
Interest income6771.9%6421.5%
Interest expense8412.4%7331.8%
Equity income (Loss) – Net1,0713.0%8352.0%
Other income (Loss) – Net(1,666)(4.7%)(1,234)(2.9%)
Income from continuing operations before income taxes6,74219.0%8,13619.4%
Income taxes from continuing operations(5,560)15.7%(1,586)3.8%
Net income from continuing operations1,1823.3%6,55015.6%
Income from discontinued operations1010.3%-0.0%
Consolidated net income1,2833.6%6,55015.6%

Common size balance sheet is as follows:

C-C Company and Subsidiaries
Common size balance sheet
For the year ended December 31st
Particulars20172016
Amount ($)%Amount ($)%
Assets    
Cash and cash equivalents6,0066.8%8,5559.8%
Short term investments and marketable securities14,66916.7%13,64615.6%
Trade accounts receivable3,6674.2%3,8564.4%
Inventories2,6553.0%2,6753.1%
Prepaid expenses and other current assets9,54810.9%5,2786.0%
Total current assets36,54541.6%34,01039.0%
Equity method investments20,85623.7%16,26018.6%
Other investments1,0961.2%9891.1%
Property, plant and equipment – Net8,2039.3%10,63512.2%
Goodwill and other intangible assets16,63618.9%21,12824.2%
Other assets4,5605.2%4,2484.9%
Total assets87,896100%87,270100%
     
Liabilities and equity    
Accounts payable and accrued expenses8,74810%9,49010.9%
Loans and notes payable13,20515.0%12,49814.3%
Current maturities of long term debt3,2983.8%3,5274.0%
Accrued income taxes4100.5%3070.4%
Other current liabilities1,5331.7%7100.8%
Total current liabilities27,19430.9%26,53230.4%
Long term debt31,18235.5%29,68434.0%
Other liabilities8,0219.1%4,0814.7%
Deferred income taxes2,5222.9%3,7534.3%
Total liabilities68,91978.4%64,05073.4%
Total equities18,97721.6%23,22026.6%
Total liabilities and equities87,896100%87,270100%

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.

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Which method results in a more realistic amount for income because it matches the most current costs against revenue? a.FIFO b.Weighted average cost c.Specific identification d.LIFO
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