Question

Simon Company’s year-end balance sheets follow. Express the balance sheets in common-size percents. Round amounts to the nearest one-tenth of a percent. Analyze and comment on the results.

At December 31	2017	2016	2015
Assets
Cash	\( 31,800	\) 35,625	\( 37,800
Accounts receivable, net	89,500	62,500	50,200
Merchandise inventory	112,500	82,500	54,000
Prepaid expenses	10,700	9,375	5,000
Plant assets, net	278,500	255,000	230,500
Total assets	\)523,000	\(445,000	\)377,500
Liabilities and Equity
Accounts payable	\(129,900	75,250	\) 51,250
Long-term notes payable secured by mortgages on plant assets	98,500	101,500	83,500
Common stock, \(10 par value	163,500	163,500	163,500
Retained earnings	131,100	104,750	79,250
Total liabilities and equity	\)523,000	\(445,000	\)377,500

Short answer

Cash as a percentage of assets has declined, accounts receivable have increased as a percent, Plant assets have declined as a percent, Accounts payable have markedly increased as a percent, and common stock has markedly declined.

Step-by-step solution

Meaning of Balance Sheet

The balance sheet is not an account but a financial statement representing the position of business assets, liabilities, and equity on a particular date.

Expressing the balance sheets in common-size percent

Simon Company Common Size Comparative Balance sheets December 31, 2015-2017
At December 31	2017	2016	2015
Assets
Cash	6.1%	8.0%	10.0%
Accounts receivable, net	17.1	18.5	14.3
Merchandise inventory	21.5	18.5	14.3
Prepaid expenses	2.0	2.1	1.3
Plant assets, net	53.3	57.3	61.1
Total assets	100.0%	100.0%	100.0%
Liabilities and Equity
Accounts payable	24.8%	16.9%	13.6%
Long-term notes payable secured by mortgages on plant assets	18.8	22.9	22.1
Common stock, $10 par value	31.3	36.7	43.3
Retained earnings	25.1	23.5	21.0
Total liabilities and equity	100.0%	100.0%	100.0%

Here, formula used to calculate the common size percentage is

$\mathit{C}\mathit{o}\mathit{m}\mathit{m}\mathit{o}\mathit{n}\mathit{s}\mathit{i}\mathit{z}\mathit{e}\mathit{p}\mathit{e}\mathit{r}\mathit{c}\mathit{e}\mathit{n}\mathit{t}\mathbf{=}\frac{\mathbf{A}\mathbf{n}\mathbf{a}\mathbf{y}\mathbf{l}\mathbf{s}\mathbf{i}\mathbf{s}\mathbf{a}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{A}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}\mathbf{\times }\mathbf{100}$

Analysis: Several conclusions can be drawn.

1. As long as enough cash is available for operations, the drop in cash as a percent of assets is advantageous.

1. The percentage of assets that are accounts receivable has increased. It could be negativebecause it means that more assets are exposed to the risk of non-collection and that assets are being held inactively. However, it could also be a positive if increased sales outweigh the costs and risks.
2. Plant assets as a percentage of total assets havedecreased. It is good if the company is functioning more effectively; however, it could be bad if it is downsizing due to underwhelming performance.
3. Accounts payable have significantly increased as a percentage of assets, which may indicate liquidity issues.
4. The price of common stock has significantly dropped; this can be due to a stock buyback program or other measures to lower the number of shares outstanding.