Exercise 3 : A firm has sales of $2,190, net income of $174, net fixed assets...

Exercise 3 : A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720. The firm has $310 in inventory. What is the common-size statement value of inventory? Also explain the implications of common size analysis.

Expert Solution

Total assets=Net fixed assets +Current assets=$1600+$720=$2320
Given that the firm has $310 in inventory.
Common size statement value of the inventory=Inventory balance/Total assets=$310/$2320=13.36%

Implications:
It is easy to understand and gives comparison at a glance like increase or decrease in percentage of any item in different years.

It helps in getting trends related to the percentage of each asset with respect to total assets and the percentage of each liability with respect to total liability, the share of each item with respect to sales in the income statement. After analyzing the impact of each item in the financial statements, a company can take the necessary actions accordingly.

It helps in analyzing the structural relations between various components of the financial statements like costs, expenses and assets, liabilities with respect to the total assets or liabilities and capital requirements.

jeff jeffy answered 1 year ago

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