Question

Exercise 13-6 Common-size percents LO P2 Simon Company's year-end balance sheets follow. Current Yri Yr Ago 2 Yrs Ago At December 31 Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Long-term notes payable secured by mortgages on plant assets Common stock, $10 par value Retained earnings Total liabilities and equity $ 27,842 81,493 102,462 8,877 246,551 $ 467,225 $ 31,900 $ 33,908 55,825 46,114 74,514 48,635 8,458 3,805 232,083 210,038 $ 402,780 $ 342,500 $ 115,176 $ 66,708 $ 46,566 86,960 163,500 101,589 $ 467,225 93,566 74,179 163,500 163,500 79,006 58,255 $ 402,780 $ 342,500 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

The solution of Point 1: Express the balance sheet in common-size percents

Background: A common size balance sheet is a balance sheet that displays both the numeric value and relative percentage for total assets, total liabilities, and equity accounts.

SIMON COMPANY
Common Size Comparative
31-Dec
Assets	Current Year	Working	Current Year	1 Year Ago	1 Year Ago	2 Year Ago	2 Year Ago
Cash	27,842	27,842/467,225	6.0%	31,900	7.9%	33,908	9.9%
Accounts Receivables, net	81,493	81,493/467,225	17.4%	55,825	13.9%	46,114	13.5%
Merchandise Inventory	102,462	102,462/467,225	21.9%	74,514	18.5%	48,635	14.2%
Prepaid Expenses	8,877	8,877/467,225	1.9%	8,458	2.1%	3,805	1.1%
Plant assets, net	246,551	246,551/467,225	52.8%	232,083	57.6%	210,038	61.3%
Total Assets	467,225	467,225/467,225	100.0%	402,780	100.0%	342,500	100.0%
Liabilities and Equity
Accounts payable	115,176	115,176/467,225	24.7%	66,708	16.6%	46,566	13.6%
Long-term notes payable secured by a mortgage on plant assets	86,960	86,960/467,225	18.6%	93,566	23.2%	74,179	21.7%
Common Stock $ 10 par	163,500	163,500/467,225	35.0%	163,500	40.6%	163,500	47.7%
Retained Earnings	101,589	101,589/467,225	21.7%	79,006	19.6%	58,255	17.0%
Total Liabilities and equity	467,225	467,225/467,225	100.0%	402,780	100.0%	342,500	100.0%

Note: Details working provided for the Current Year. Kindly consider the column highlighted with green as the final answer for submission.

The solution of Point 2: Considering annual sales have not changed in the last three years, the change in accounts receivable as a percentage of total assets is unfavorable.

Reason:- As data provided below for accounts receivable (extract from the above common size balance sheet).

	Current Year	1 Year Ago	2 Year Ago
Accounts Receivables, net	17.4%	13.9%	13.5%

The percentage increases constantly from 2 years ago till the current year, which is not a good sign considering the sales remain the same.

The solution of Point 3: Similar to point 2 Considering annual sales have not changed in the last three years, the change in merchandise inventory as a percentage of total assets is unfavorable.

Reason:- As data provided below for accounts receivable (extract from the above common size balance sheet).

	Current Year	1 Year Ago	2 Year Ago
Merchandise Inventory	21.9%	18.5%	14.2%

The percentage increases constantly from 2 years ago till the current year, which is not a good sign considering the sales remain the same.

The rationale for Point 2 and 3: It's not ideal for a company to increase the receivable and inventory at the same sales level.