Chapter 13, Problem 2PSB

To determine

Current ratio:

Current ratio is the ratio which is used to measure a company’s liquidity and it considers current assets and current liabilities.

Common size income statement:

Common size income statement is the income statement in which individual account is presented in form of sales value.

Trend percents:

A data presentation to show change over a quite long period of time is known as trend percents. In this analysis items are expressed as a percentage of a base year and items are taken line by line.

1.

To compute: Current ratio of B Company for the years 2017, 2016 and 2015.

Explanation of Solution

Formula to calculate current ratio is,

  $\text{Current}\text{ratio}=\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$

2017

Given,

Current assets are $54,860.

Current liabilities are $22,370.

Substitute $54,860for current assets and $22,370 for current liabilities in the above formula.

  $\begin{array}{c}\text{Current}\text{ratio}=\frac{\$54,860}{\$22,370}\\ =2.45\end{array}$

2016

Given,

Current assets are $32,660.

Current liabilities are $19,180

Substitute $32,660 for current assets and $19,180 for current liabilities.

  $\begin{array}{c}\text{Current}\text{ratio}=\frac{\$32,660}{\$19,180}\\ =1.70\end{array}$

2015

Given,

Current assets are $36,300.

Current liabilities are $16,500.

Substitute $36,300 for current assets and $16,500 for current liabilities in the above formula.

  $\begin{array}{c}\text{Current}\text{ratio}=\frac{\$36,300}{\$16,500}\\ =2.2\end{array}$

Thus, current ratios of B Company are 2.45, 1.70 and 2.2 for the year 2017, 2016 and 2015 respectively.

2.

To determine

To prepare: Common size income statement of B Company.

Explanation of Solution

Common size income statement is express in form of percentage which helps to analyze the statement in a better way.

B COMPANY
Common Size Income Statement
For the Year Ended December31, 2017, 2016 and 2015
				Common size percents
Particulars	2017($)	2016($)	2015($)	2017	2016	2015
Sales	198,800	166,000	143,800	100	100	100
Cost of goods sold	108,890	86,175	66,200	54.77	52	46.04
Gross profit	89,910	79,825	77,600	45.23	48.1	54
Selling expenses	22,680	19,790	18,000	11.41	12	12.52
Administrative expenses	16,760	14,610	15,700	8.43	8.80	11
Total expenses	39,440	34,400	33,700	19.84	20.8	23.52
Income before taxes	50,470	45,425	43,900	25.39	27.3	30.48
Income taxes	60,50	5,910	5,300	3.04	3.56	3.7
Net income	44,420	39,515	38,600	22.34	23.80	26.84

Table (1)

Hence , B Company has common size percents of net income 22.34%, 23.80% and 26.84% in the year of 2017, 2016 and 2015 respectively.

Working Notes:

Formula to calculate common size percent is:

  $\text{Common}\text{size}\text{percent}\text{(\%)}=\frac{\text{Analysis}}{\text{Base}\text{amount}}\times 100$

2017

Calculation of common percent of sales,

  $\begin{array}{c}\text{Common percent of Sales}=\frac{\$198,800}{\$198,800}\times 100\\ =100\%\end{array}$

Calculation of common percent of cost of goods sold,

  $\begin{array}{c}\text{Common percent of cost of goods sold}=\frac{\$108,890}{\$198,800}\times 100\\ =54.77\%\end{array}$

Calculation of common percent of gross profit,

  $\begin{array}{c}\text{Common percent of gross}\text{profit}=\frac{\$89,910}{\$198,800}\times 100\\ =45.23\%\end{array}$

Calculation of common percent of selling expenses,

  $\begin{array}{c}\text{Common percent of selling}\text{expenses}=\frac{\$22,680}{\$198,800}\times 100\\ =11.41\%\end{array}$

Calculation of common percent of administrative expenses,

  $\begin{array}{c}\text{Common}\text{percent}\text{of}\text{administrative expenses}=\frac{\$16,760}{\$198,800}\times 100\\ =8.43\%\end{array}$

Calculation of common percent of income taxes,

  $\begin{array}{c}\text{Common percent of}\text{income taxes}=\frac{\$6,050}{\$198,800}\times 100\\ =3.04\%\end{array}$

Calculation of common percent of net income,

  $\begin{array}{c}\text{Common percent of net}\text{income}=\frac{\$44,420}{\$198,800}\times 100\\ =22.34\%\end{array}$

2016

Calculation of common percent of sales,

  $\begin{array}{c}\text{Common percent of Sales}=\frac{\$166,000}{\$166,000}\times 100\\ =100\%\end{array}$

Calculation of common percent of cost of goods sold,

  $\begin{array}{c}\text{Common percent of cost of}\text{goods sold}=\frac{\$86,175}{\$166,000}\times 100\\ =52\%\end{array}$

Calculation of common percent of gross profit,

  $\begin{array}{c}\text{Common percent of gross}\text{profit}=\frac{\$79,825}{\$166,000}\times 100\\ =48.1\%\end{array}$

Calculation of common percent of selling expenses,

  $\begin{array}{c}\text{Common percent of selling}\text{expenses}=\frac{\$19,790}{\$166,000}\times 100\\ =12\%\end{array}$

Calculation of common percent of administrative expenses,

  $\begin{array}{c}\text{Common percent of}\text{administrative expenses}=\frac{\$14,610}{\$166,000}\times 100\\ =8.80\%\end{array}$

Calculation of common percent of income taxes,

  $\begin{array}{c}\text{Common percent of}\text{income taxes}=\frac{\$5,910}{\$166,000}\times 100\\ =3.56\%\end{array}$

Calculation of common percent of net income,

  $\begin{array}{c}\text{Common percent of net}\text{income}=\frac{\$39,515}{\$166,000}\times 100\\ =23.80\%\end{array}$

2015

Calculation of common percent of sales,

  $\begin{array}{c}\text{Common percent of Sales}=\frac{\$143,800}{\$143,800}\times 100\\ =100\%\end{array}$

Calculation of common percent of cost of goods sold,

  $\begin{array}{c}\text{Common percent of cost of}\text{goods sold }=\frac{\$66,200}{\$143,800}\times 100\\ =46.04\%\end{array}$

Calculation of common percent of gross profit,

  $\begin{array}{c}\text{Common percent of gross}\text{profit}=\frac{\$77,600}{\$143,800}\times 100\\ =54\%\end{array}$

Calculation of common percent of selling expenses,

  $\begin{array}{c}\text{Common percent of selling}\text{expenses}=\frac{\$18,000}{\$143,800}\times 100\\ =12.52\%\end{array}$

Calculation of common percent of administrative expenses,

  $\begin{array}{c}\text{Common percent of}\text{administrative expenses}=\frac{\$15,700}{\$143,800}\times 100\\ =11\%\end{array}$

Calculation of common percent of income taxes,

  $\begin{array}{c}\text{Common percent of}\text{income taxes}=\frac{\$5,300}{\$143,800}\times 100\\ =3.7\%\end{array}$

Calculation of common percent of net income,

  $\begin{array}{c}\text{Common}\text{percent of net}\text{income}=\frac{\$38,600}{\$143,800}\times 100\\ =26.84\%\end{array}$

3.

To determine

To compute: Trend percents of balance sheet items taking 2015 as base year.

Explanation of Solution

Balance Sheet of B Company as mentioned below:

B Company
Balance Sheet
For the year ended December 31, 2017 and 2016
			Trend Percents (%)
Particular	2017($)	2016($)	2017	2016
Assets
Current assets	54,860	32,660	151.13	90
Long-term investments	0	17,00	0	16.04
Plant assets, net	112,810	113,660	142.8	143.87
Total assets	167,670	148,020	133.18	117.57
Liabilities and Equity
Current liabilities	22,370	19,180	135.58	116.24
Common stock	46,500	46,500	125.68	125.68
Other paid- in capital	13,850	13,850	122.57	122.57
Retained earnings	84,950	68,490	139.03	112.09
Total liabilities and equity	167,670	148,200	133.18	117.57

Table (2)

Thus, total assets trend percent in 2017 is 133.18% and in 2016 is 117.57%

Working notes:

Formula to calculate trend percent is,

  $\text{Trend}\text{Percent}\text{(\%)}=\frac{\text{Analysis}\text{period}\text{amount}}{\text{Base}\text{period}\text{amount}}\times \text{100}$

2017

Calculation of trend percent of current assets,

  $\begin{array}{c}\text{Current}\text{assets}\text{trend \%}=\frac{\$54,860}{\$36,300}\times 100\\ =151.13\%\end{array}$

Calculation of trend percent of long term investments,

  $\begin{array}{c}\text{Long term}\text{investments trend \%}=\frac{\$0}{\$10,600}\times 100\\ =0\%\end{array}$

Calculation of trend percent of plant assets,

  $\begin{array}{c}\text{Plant assets trend \%}=\frac{\$112,810}{\$79,000}\times 100\\ =142.8\%\end{array}$

Calculation of trend percent of total assets,

  $\begin{array}{c}\text{Total assets trend \%}=\frac{\$167,670}{\$125,900}\times 100\\ =133.18\%\end{array}$

Calculation of trend percent of current liabilities,

  $\begin{array}{c}\text{Current liabilities trend \%}=\frac{\$22,370}{\$16,500}\times 100\\ =135.58\%\end{array}$

Calculation of trend percent of common stock,

  $\begin{array}{c}\text{Common stock trend}\text{\%}=\frac{\$46,500}{\$37,000}\times 100\\ =125.68\%\end{array}$

Calculation of trend percent of other paid in capital,

  $\begin{array}{c}\text{Other}\text{paid-in capital}\text{trend}\text{\%}=\frac{\$13,850}{\$11,300}\times 100\\ =122.57\%\end{array}$

Calculation of trend percent of retained earnings,

  $\begin{array}{c}\text{Retained earnings trend}\%=\frac{\$84,950}{\$61.100}\times 100\\ =139.03\%\end{array}$

Calculation of trend percent of total liabilities and equity,

  $\begin{array}{c}\text{Total}\text{liabilities and}\text{equity}\text{\%}=\frac{\$167,670}{\$125,900}\times 100\\ =133.18\%\end{array}$

2016

Calculation of trend percent of current assets,

  $\begin{array}{c}\text{Current}\text{assets}\text{trend }\%=\frac{\$32,660}{\$36,300}\times 100\\ =90\%\end{array}$

Calculation of trend percent of long term investments,

  $\begin{array}{c}\text{Long term}\text{investments trend \%}=\frac{\$1,700}{\$10,600}\times 100\\ =16.04\%\end{array}$

Calculation of trend percent of plant assets,

  $\begin{array}{c}\text{Plant assets trend \%}=\frac{\$113,660}{\$79,000}\times 100\\ =143.87\%\end{array}$

Calculation of trend percent of total assets,

  $\begin{array}{c}\text{Total assets trend \%}=\frac{\$148,020}{\$125,900}\times 100\\ =117.57\%\end{array}$

Calculation of trend percent of current liabilities,

  $\begin{array}{c}\text{Current liabilities trend \%}=\frac{\$19,180}{\$16,500}\times 100\\ =116.24\%\end{array}$

Calculation of trend percent of common stock,

  $\begin{array}{c}\text{Common}\text{stock}\text{trend}\text{\%}=\frac{\$46,500}{\$37,000}\times 100\\ =125.68\%\end{array}$

Calculation of trend percent of other paid in capital,

  $\begin{array}{c}\text{Other}\text{paid-in capital}\text{trend}\text{\%}=\frac{\$13,850}{\$11,300}\times 100\\ =122.57\%\end{array}$

Calculation of trend percent of retained earnings,

  $\begin{array}{c}\text{Retained earnings trend}\%=\frac{\$68,490}{\$61,100}\times 100\\ =112.09\%\end{array}$

Calculation of trend percent of total liabilities and equity,

  $\begin{array}{c}\text{Total}\text{liabilities and}\text{equity}\%=\frac{\$148,020}{\$125,900}\times 100\\ =117.57\%\end{array}$

4.

To determine

To explain: Analyze computed ratios and percents.

Explanation of Solution

• 2:1 is the ideal current ratio which a company should maintain. Near to ideal ratio of B Company is in the year of 2015 which is 2.2:1.
• On the basis of common size percents and trend percents there is an increasing element in the relative percent.
• B Company has common size percents of net income 22.34%, 23.80% and 26.84% in the year of 2017, 2016 and 2015 respectively.
• Total assets trend percent of the company in 2017 is 133.18% and in 2016 is 117.57% which shows increment of 15.61% $\left(133.18\%-117.57\%\right)$ .

Thus, B Company’s trend percents show its efficiency in its operations.