Question

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		$54,922		$42,893		$35,526
Cost of goods sold		32,936		25,682		21,721
Gross margin		$21,986		$17,211		$13,805
Other income, net		397		439		421
		$22,383		$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		$ 3,170		$ 2,122		$ 850
Provision for income taxes		885		746		623
Net income		$ 2,285		$ 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

Common Size Income Statement for Groff Graphics Company

Particulars	2017	2018	2019	%2017	%2018	%2019
Sales	$35,526	$42,893	$54,922	100	120.74	154.59
Cost of goods sold	21,721	25,682	32,936	100	118.24	151.63
Gross margin	$13,805	$17,211	$21,986	100	124.67	159.26
Other income, net	421	439	397	100	104.27	94.3
	$14,226	$17,650	$22,383	100	124.1	157.34
Costs and Expenses:
Selling and administrative	$12,754	$14,665	$17,857	100	114.98	140.01
Interest	622	863	1,356	100	138.75	218
Total costs and expense	$13,376	$15,528	$19,213	100	116.1	143.64
Income before income taxes	$ 850	$ 2,122	$ 3,170	100	249.65	372.94
Provision for income taxes	623	746	885	100	119.74	142.05
Net income	$ 227	$ 1,376	$ 2,285	100	606.17	1006.61

Common-size financial Statements for Groff Graphics Company

Particulars	2017	2018	2019	%2017	%2018	%2019
ASSETS
Current assets:
Cash	$245	$301	$372	100	122.86	151.84
Accounts receivable	3,369	3,546	4,798	100	105.25	142.42
Inventories	3,389	4,521	5,673	100	133.40	167.4
Total current assets	$7,003	$8,368	$10,843	100	119.49	154.83
Property, plant and equipment (net)	2,937	3,541	4,912	100	120.56	167.24
Other assets	552	592	592	100	107.25	107.25
Total assets	$10,492	$12,501	$16,347	100	119.15	155.80

Ans1.

Sales	154.59%
Net Income	1006.61%
Assets	155.80%

Ans 2. Groff financed its asset growth through an increase in retained earnings and an increase in current liabilities. As his retained earnings increased to 252.51% and current liabilities increased 447.03% during the three years.

Ans3. To check Groffs liquidity , we can calculate current ratio(CR), which is Current Assets/Current Liabilities

So here During all 3 years

2017 CR= 7003/1246= 5.6

2018 CR= 8368/$2,718= 3.08

2019 CR= $10,843/5570= 1.95, yes liquidity is adequate.

Ans 4. Because short-term notes payable is increasing.

Ans5. Groff Sales grow by 25% in 2020, so as sales is 54922 so in 2020 it is expected to be $68652.50 so net income would be $3633.15.

Ans6. the total assest after 25% increase will be 20433.75, and net income will be decreased by $1142.5, so now the capital need to be raised in 2020 is $5229.25 to match the total assets side.