Question

Simon Company's year-end balance sheets follow. At December 31 Current Yr 1 Yr Ago 2 Yrs Ago Assets Cash $ 35,340 $ 39,304 $ 41,359 Accounts receivable, net 101,431 69,483 53,004 Merchandise inventory 125,030 90,890 56,443 Prepaid expenses 10,828 10,738 4,506 Plant assets, net 308,905 290,907 250,288 Total assets $ 581,534 $ 501,322 $ 405,600 Liabilities and Equity Accounts payable $ 143,354 $ 85,571 $ 53,004 Long-term notes payable secured by mortgages on plant assets 110,422 118,763 87,845 Common stock, $10 par value 163,500 163,500 163,500 Retained earnings 164,258 133,488 101,251 Total liabilities and equity $ 581,534 $ 501,322 $ 405,600 1. Express the balance sheets in common-size percents. (Do not round intermediate calculations and round your final percentage answers to 1 decimal place.) 2. Assuming annual sales have not changed in the last three years, is the change in accounts receivable as a percentage of total assets favorable or unfavorable? 3. Assuming annual sales have not changed in the last three years, is the change in merchandise inventory as a percentage of total assets favorable or unfavorable?

Answer 1

Part 1

SIMON Company

Common-Size Comparative Balance Sheets

December 31

	Current year	1 year ago	2 years ago
Assets
Cash	6.1%	7.8%	10.2%
Accounts receivable, net	17.4%	13.9%	13.1%
Merchandise inventory	21.5%	18.1%	13.9%
Prepaid expenses	1.9%	2.1%	1.1%
Plant assets, net	53.1%	58.0%	61.7%
Total assets	100.0%	100.0%	100.0%
Liabilities and equity
Accounts payable	24.7%	17.1%	13.1%
Long-term notes payable secured by mortgages on plant assets	19.0%	23.7%	21.7%
Common stock	28.1%	32.6%	40.3%
Retained earnings	28.2%	26.6%	25.0%
Total liabilities and equity	100.0%	100.0%	100.0%

In Common-Size Comparative Balance Sheets all balance sheet items are converted in the percentage form on the basis of total assets. This make the comparing and analyzing financial statements easy.

To calculate percentage, each item of balance sheet is divided by the total assets of respective year

For example,

% of Merchandise inventory (current year) = merchandise inventory (Current year) / total assets (Current year) = 125030/581534 = 21.5%

Part 2

2.	Changes in account receivable	Unfavorable
3.	Changes in merchandise inventory	favorbale

Change in accounts receivable is unfavorable as it indicates it has increased credit period

Change in merchandise inventory is favorable because it indicates decrease in cost of goods sold.