Answer:
Simon Company
a. Expressing the balance sheets in common-size percents:
Simon Company's Year-end Balance Sheet:
At December 31 Current Yr % 1 Yr Ago % 2 Yrs Ago %
Assets
Cash $31,800 6% $35,625 8% $37,800 10%
Accounts receivable, net 89,500 17% 62,500 14% 50,200 13.3%
Merchandise inventory 112,500 22% 82,500 19% 54,000 14.3%
Prepaid expenses 10,700 2% 9,375 2% 5,000 1.3%
Plant assets, net 278,500 53% 255,000 57% 230,500 61.1%
Total assets $523,000 100% $445,000 100% $377,500 100%
Liabilities and Equity:
Accounts payable $129,900 25% $75,250 17% $51,250 14%
Long-term notes payable 98,500 19% 101,500 23% 83,500 22%
Common stock, $10
par value 163,500 31% 163,500 37% 163,500 43%
Retained earnings 131,100 25% 104,750 23% 79,250 21%
Total liabilities & equity $523,000 100% $445,000 100% $377,500 100%
b. The change in accounts receivable has been unfavorable. It has increased year on year, showing that the management has not improved on its collection policies and practices. This conclusion is based on the assumption that annual sales have not changed in the last three years.
c. The change in merchandise inventory has been unfavorable. It has increased in its percentages over total assets over the last three years. It shows that the management is increasingly keeping excess inventory. Again, this conclusion is based on the assumption that annual sales have not changed in the last three years.
Explanation:
a) Data and Calculations:
Simon Company's Year-end Balance Sheet:
At December 31 Current Yr 1 Yr Ago 2 Yrs Ago
Assets
Cash $31,800 $35,625 $37,800
Accounts receivable, net 89,500 62,500 50,200
Merchandise inventory 112,500 82,500 54,000
Prepaid expenses 10,700 9,375 5,000
Plant assets, net 278,500 255,000 230,500
Total assets $523,000 $445,000 $377,500
Liabilities and Equity:
Accounts payable $129,900 $75,250 $51,250
Long-term notes payable 98,500 101,500 83,500
Common stock, $10
par value 163,500 163,500 163,500
Retained earnings 131,100 104,750 79,250
Total liabilities & equity $523,000 $445,000 $377,500
b) The common-size percents are determined by taking a balance sheet account and expressing it as percentage of the total assets. For example, the common stock for the current year is $163,500. When this is expressed as a percentage of total assets, which is equal to total liabilities and equity, we have it as 31% ($163,500/$523,000 * 100) approximately.
