Question

Problem 12-88B (Algorithmic)
Using Common Size Statements

Groff Graphics Company owns and operates a small chain of sportswear stores located near colleges and universities. Groff has experienced significant growth in recent years. The following data are available for Groff:

Groff Graphics Company
Consolidated Income Statement
(In thousands)
	Year ended December 31,
		2019		2018		2017
Sales		$54,322		$42,893		$35,526
Cost of goods sold		32,936		25,682		21,721
Gross margin		$21,386		$17,211		$13,805
Other income, net		397		439		421
		$21,783		$17,650		$14,226
Costs and Expenses:
Selling and administrative		$17,857		$14,665		$12,754
Interest		1,356		863		622
Total costs and expenses		$19,213		$15,528		$13,376
Income before income taxes		$ 2,570		$ 2,122		$ 850
Provision for income taxes		885		746		623
Net income		$ 1,685		$ 1,376		$ 227

Groff Graphics Company
Consolidated Balance Sheets
(In thousands)
	December 31,
ASSETS		2019		2018		2017
Current assets:
Cash		$372		$301		$245
Accounts receivable		4,798		3,546		3,369
Inventories		5,673		4,521		3,389
Total current assets		$10,843		$8,368		$7,003
Property, plant and equipment (net)		4,912		3,541		2,937
Other assets		592		592		552
Total assets		$16,347		$12,501		$10,492
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable		$4,314		$1,731		$463
Accounts payable		1,256		987		783
Total current liabilities		$5,570		$2,718		$1,246
Long-term debt		3,241		3,234		3,266
Total liabilities		$8,811		$5,952		$4,512
Common stock & additional paid-in capital		$4,367		$4,598		$4,725
Retained earnings		3,169		1,951		1,255
Total stockholders' equity		$7,536		$6,549		$5,980
Total liabilities and stockholders' equity		$16,347		$12,501		$10,492

Required:

1. Calculate how much Groff's sales, net income, and assets have grown during these 3 years. Round your answers to the nearest whole percent.

Sales	%
Net income	%
Assets	%

2. Explain how Groff has financed the increase in assets.

Groff financed its asset growth through an increase in retained earnings and an increase in current liabilities.

3. Conceptual Connection: Is Groff's liquidity is adequate?
Yes

4. Conceptual Connection: Why is interest expense growing?

Because short-term notes payable is increasing.

5. If Groff's sales grow by 25% in 2020, what would you expect net income to be? Round your answer to the nearest dollar. Use your answer in the following calculations.
$

6. If Groff's assets must grow by 25% to support the 25% sales increase and if 50% of net income is paid in dividends, how much capital must Groff raise in 2020? Round your answer to the nearest cent.
$

Answer 1

Answer 1:

Sales	153% ($54,322/$35,526*100) or 53%
Net income	742% ($1,685/$227*100) or 642%
Assets	156% ($16,347/$10,492*100) or 56%

Answer 5 :

If Sales increases by 25%, Sales figure for 2020= $54,322*125%= $67,903

Assuming continuation of Percentage of Net Income to sales like the previous year i.e. 3.10%, Net Income must be $67,903x3.10%= $2,106

Groff Graphics Company
Consolidated Income Statement Common sized
(In thousands)
	Year ended December 31,
		2019		2018		2017
Sales	100%	$54,322	100%	$42,893	100%	$35,526
Cost of goods sold	60.63%	32,936	59.87%	25,682	61.14%	21,721
Gross margin	39.37%	$21,386	40.13%	$17,211	38.86%	$13,805
Other income, net	0.73%	397	1.02%	439	1.19%	421
	40.10%	$21,783	41.15%	$17,650	40.04%	$14,226
Costs and Expenses:
Selling and administrative	32.87%	$17,857	34.19%	$14,665	35.90%	$12,754
Interest	2.50%	1,356	2.01%	863	1.75%	622
Total costs and expenses	35.37%	$19,213	36.20%	$15,528	37.65%	$13,376
Income before income taxes	4.73%	$2,570	4.95%	$2,122	2.39%	$850
Provision for income taxes	1.63%	885	1.74%	746	1.75%	623
Net income	3.10%	1685	3.21%	$1,376	0.64%	227

Answer 6 :

New Total Asset amount=$16,347*125%=$20,434 (taking into account reduction in Cash due to payment of Dividened)

New Retained earnings=$3,169+$2,106/2=$4,222

Therefore Capital to be raised = Additional Retained earnings + Additional Total asset value=$3,037 approx