Question

Income Statement Balance Sheet 2016 2017 2016 2017 36,960 41,525 616 583 Net sales Cost of good sold Depreciation 28,829 31,094 1,232 1,204 Assets Cash and securities Accounts receivable Inventories Total current assets Net fixed assets 3,327 3,738 880 1,008 EBIT 4,804 6,693 2,728 2,795 60 68 6,072 6,445 Interest expense Tax (30%) 1,424 1,988 9,240 Net Income 3,320 4,637 359 381 Total assets 8,800 Liabilities and Owners' Equity Accounts payable 352 Short-term notes 352 Total current 704 liabilities Long-term debt 500 Common stock 1,899 Retained earnings 5,697 Total liabilities and owners' equity 8,800 740 563 2,222 5,715 9,240

Answer 1

Solution :

A 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 i.e.,

= Balance sheet Item / Total assets

Calculation of Common size ratio of Year 2016 :

As per the Information given in the question for the Year 2016 we have :

Inventories = $ 880   ;    Total Assets = $ 8,800    ;

Thus the common size ratio for Inventories for the year 2016 is = $ 880 / $ 8,800 = 0.10 = 10 %

Calculation of Common size ratio of Year 2017 :

As per the Information given in the question for the Year 2017 we have :

Inventories = $ 1,008   ;    Total Assets = $ 9,240    ;

Thus the common size ratio for Inventories for the year 2017 is = $ 1,008 / $ 9,240 = 0.109091

= 10.9091 %

The percentage point change between 2016 and 2017 on inventories is

= Common size ratio of Inventories Year 2017 - Common size ratio of Inventories Year 2017

= 10.9091 % - 10.0 %

= 0.9091 %

= 0.91 % ( when rounded off to two decimal places )

Thus the solution is Option 1 = 0.91 percentage point increase