Part 2 TKM0844 11E IM Ch04

Chapter 4
Financial Analysis: Sizing Up Firm Performance
4-1.

To create a common size income statement for Carver Enterprises, we need to express the given dollar amounts as proportions of sales. Transforming the dollar amounts into proportions allows us to compare Carver’s situation with other firms, even if those other firms have drastically higher or lower sales than Carver’s.
Expressing each dollar amount as a percentage of Carver’s $30,000 in sales, we find:

Income Statement
Revenues
Cost of goods sold
Gross profit
Operating expenses
Net Operating Income
Interest expense
Earnings before taxes
Taxes
Net income

2010
$30,000
($20,000)
$10,000
($8,000)
$2,000
($900)
$1,100
($400)
$700

% of sales example calculations:
100%
-67%
= ($20,000)/$30,000
33%
-27%
7%
-3%
4%
-1%
2%
= $700/$30,000

Carver’s cost of goods sold represents 2/3 of its sales revenue, making it by far the most important driver of Carver’s profitability. Operating expenses are still a hefty 27%, however.
To create Carver’s common size balance sheet, we will again translate the relevant dollar amounts by expressing them as proportions of a given whole. However, while we used sales (an income statement total) as our reference figure for the income statement, here we will use total assets (a balance sheet total). Thus for Carver, we divide all of the given values by $33,000, which gives us the following:

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Solutions to End of Chapter Problems—Chapter 4

Balance Sheet
Cash & Marketable Securities
Accounts Receivable
Inventories
Total Current Assets
Net Property Plant & Equipment
Total Assets

2010
$500
$6,000
$9,500
$16,000
$17,000
$33,000

% of TA
2%
18%
29%
48%
52%
100%

Accounts payable
Short-term Debt
Total current liabilities
Long-term Liabilities
Total Liabilities
Total Owner's Equity
Total Liabilities & Owner's Equity

$7,200
$6,800
$14,000
$7,000
$21,000
$12,000
$33,000

22%
21%
42%
21%
64%
36%
100%

93

example calculations:

=