Question

Key figures for Apple and Google follow.

\( million	Apple	Google
Cash and equivalents	\)21,120	$16,549
Accounts receivable, net	16,849	11,556
Inventories	2,349	0
Retained earnings	92,284	90,892
Cost of sales	140,089	28,164
Revenue	233,715	74,989
Total assets	290,479	147,461

Required

1. Compute common-size percents for each of the companies using the data provided. (Round percents to one decimal.)

2. Which company retains a higher portion of cumulative net income in the company?

3. Which company has a higher gross margin ratio on sales?

4. Which company holds a higher percent of its total assets as inventory?

Short answer

1. Common size percentages:

$ million	Apple	Google
Cash and equivalents	7.27%	11.22%
Accounts receivable, net	5.80%	7.84%
Inventories	0.809%	0%
Retained earnings	31.77%	61.64%
Cost of sales	48.23%	19.10%
Revenue	80.46%	50.85%
Total assets	100%	100%

2. Google retainsa higher percentage of net income as retained earnings.

3. Google has a higher gross profit margin.

4. Apple company holds a higher inventory percentage than total assets.

Step-by-step solution

Definition of Common Size Statement

A common size statement can be defined as the statement in which all the line items of the financial statement are reflected as a percentage of the selected base item. It is known as vertical analysis of the financial statement

Common size statement

Total asset value will be considered as the base amount for preparing the common size statement:

$ million	Apple	Apple	Google	Google
Cash and equivalents	$21,120	7.27%	$16,549	11.22%
Accounts receivable, net	16,849	5.80%	11,556	7.84%
Inventories	2,349	0.809%	0	0%
Retained earnings	92,284	31.77%	90,892	61.64%
Cost of sales	140,089	48.23%	28,164	19.10%
Revenue	233,715	80.46%	74,989	50.85%
Total assets	290,479	100%	147,461	100%

Working note: Formula for determining the percentage for common size

$\mathbf{Percent}\mathbf{}\mathbf{trend}\mathbf{=}\frac{\mathbf{Line}\mathbf{}\mathbf{item}}{\mathbf{Total}\mathbf{}\mathbf{asset}}$

Company with a higher percent of retained earnings

Apple:

$\begin{array}{c}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{c}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{i}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{s}\mathbf{=}\frac{\mathbf{R}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{i}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{ea}\mathbf{r}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{s}}{\mathbf{R}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{92}\mathbf{,}\mathbf{284}}{\mathbf{\$}\mathbf{233}\mathbf{,}\mathbf{715}\mathbf{-}\mathbf{\$}\mathbf{140}\mathbf{,}\mathbf{089}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{98}\mathbf{.}\mathbf{57}\mathbf{\%}\end{array}$

Google:

$\begin{array}{c}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{c}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{of}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{i}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{s}\mathbf{=}\frac{\mathbf{R}\mathbf{e}\mathbf{t}\mathbf{a}\mathbf{i}\mathbf{n}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{e}\mathbf{a}\mathbf{r}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{s}}{\mathbf{R}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{892}}{\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{989}\mathbf{-}\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{164}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{194}\mathbf{.}\mathbf{11}\mathbf{\%}\end{array}$

Company with a higher gross margin ratio

Apple:

$\begin{array}{c}\mathbf{Gross}\mathbf{}\mathbf{profit}\mathbf{}\mathbf{ratio}\mathbf{=}\frac{\mathbf{Revenue}\mathbf{-}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{sales}}{\mathbf{Revenue}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{233}\mathbf{,}\mathbf{715}\mathbf{-}\mathbf{\$}\mathbf{140}\mathbf{,}\mathbf{089}}{\mathbf{\$}\mathbf{233}\mathbf{,}\mathbf{715}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{40}\mathbf{\%}\end{array}$

Google:

$\begin{array}{c}\mathbf{G}\mathbf{r}\mathbf{o}\mathbf{s}\mathbf{s}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{=}\frac{\mathbf{R}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}}{\mathbf{R}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{989}\mathbf{-}\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{164}}{\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{989}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{62}\mathbf{.}\mathbf{44}\mathbf{\%}\end{array}$

Company with a higher percent of inventory compared to total assets

Apple:

$\begin{array}{c}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{c}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{=}\frac{\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{349}}{\mathbf{\$}\mathbf{290}\mathbf{,}\mathbf{479}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{808}\mathbf{\%}\end{array}$

Google:

$\begin{array}{c}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{c}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{i}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}\mathbf{=}\frac{\mathbf{I}\mathbf{n}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{o}\mathbf{r}\mathbf{y}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{0}}{\mathbf{\$}\mathbf{147}\mathbf{,}\mathbf{461}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{0}\mathbf{\%}\end{array}$