Question

4) Assume that revenue is $180 million, cost of goods sold is $50 million, total assets are $800 million and inventories are $80million. On the common size statements, inventories would have an approximate value of ___ and cost of goods sold would have an approximate value of ___

Answer 1

Solution:

Calculation of Common size Balance Sheet Ratio:

The common size balance sheet is prepared by expressing each of the balance sheet items as a fraction of total assets.

It involves converting each balance item into a ratio expressed as a percentage of total assets.

Thus each Item of the Balance sheet can be converted into a common size ratio as follows

= ( Balance sheet Item / Total assets )

As per the information given in the question we have :

Inventory = $ 80 Million   ;   Total Assets = $ 800 Million

Thus the Common size ratio of Inventory in the common size Balance sheet is

= $ 80 / $ 800 = 0.10 = 10 %

Calculation of Common size Income Statement Ratio:

The common size Income Statement is prepared by expressing each of the Income Statement items as a fraction of total Revenue.

It involves converting each Income Statement item into a ratio expressed as a percentage of total Revenue.

Thus each Item of the Income Statement can be converted into a common size ratio as follows

= ( Income Statement Item / Total Revenue )

As per the information given in the question we have :

Cost of goods sold = $ 50 Million   ;   Total revenue = $ 180 Milion

Thus the Common size ratio of Cost of goods sold in the common size Income statement is

= $ 50 / $ 180 = 0.2778 = 27.78 %

On the common size statements, inventories would have an approximate value of 0.10 = 10 %

and cost of goods sold would have an approximate value of 0.2778 = 27.78 %