Use A Spreadsheet To Construct A Common-Size Balance
Use A Spread Sheet To Construct A Common Size Balan
Use a spread sheet to construct a common-size balance sheet from the following balance sheet and the income statement. Balance Sheet Assets Liabilities Cash $10,000 Accounts payable $12,000 Accounts receivable 100,000 Notes payable 50,000 Inventory 110,000 Total current liabilities $62,000 Total current assets 220,000 Long-term debt 128,000 Gross plant and equipment 500,000 Total liabilities 190,000 Less: accumulated depreciation 125,000 Common stock ($1 par, 100,000 shares) 100,000 Net plant and equipment 375,000 Paid-in-capital 155,000 Total assets 595,000 Retained earnings 150,000 Total stockholders' equity $405,000 Total liabilities and equity $595,000 Income Statement Sales $2,175,000 Cost of goods sold $575,000 Gross profit $1,600,000 General and administrative expense $200,000 Selling and marketing expense $250,000 Depreciation $50,000 Operating income $1,100,000 Interest $100,000 Income before taxes $1,000,000 Income taxes (30%) $300,000 Net income $700,000.
Paper For Above instruction
Introduction
Financial analysis is essential for understanding a company's performance and financial position. One of the key tools in financial analysis is the common-size financial statement, which allows for comparison across companies or periods by expressing each item as a percentage of a base figure. In this paper, a comprehensive process to construct a common-size balance sheet from given financial statements using spreadsheet software is detailed. The focus is on translating the provided balance sheet and income statement data into proportions, enabling easier comparison and analysis.
Methodology
The process involves several steps. First, input all the financial figures from the balance sheet and income statement into the spreadsheet. Then, determine the total assets and total liabilities & equity to serve as base figures for calculating percentages. Each line item is divided by the total assets or total liabilities & equity as appropriate to convert absolute values into percentages. This approach provides a standardized view, facilitating meaningful analysis.
Step-by-Step Construction of the Common-Size Balance Sheet
1. Input Data
Key data points from the balance sheet include cash, accounts receivable, inventory, gross plant and equipment, accumulated depreciation, and the components of liabilities and equity. The income statement provides sales, COGS, gross profit, expenses, and net income.
| Item | Amount ($) |
|---|---|
| Cash | 10,000 |
| Accounts receivable | 100,000 |
| Inventory | 110,000 |
| Gross plant and equipment | 500,000 |
| Less: accumulated depreciation | 125,000 |
| Net plant and equipment | 375,000 |
| Accounts payable | 12,000 |
| Notes payable | 50,000 |
| Long-term debt | 128,000 |
| Common stock | 100,000 |
| Paid-in-capital | 155,000 |
| Retained earnings | 150,000 |
| Total assets | 595,000 |
| Total liabilities and equity | 595,000 |
2. Calculate Total Asset Base
The total assets serve as the denominator for most balance sheet items. Confirm or compute total assets, which are already given as $595,000, summing current and non-current assets.
3. Compute Percentages
Convert each asset and liability item into a percentage of total assets:
- Cash percentage = (Cash / Total Assets) x 100 = (10,000 / 595,000) x 100 ≈ 1.68%
- Accounts receivable percentage = (100,000 / 595,000) x 100 ≈ 16.81%
- Inventory percentage = (110,000 / 595,000) x 100 ≈ 18.49%
- Net plant and equipment percentage = (375,000 / 595,000) x 100 ≈ 63.03%
Similarly, liabilities and equity are calculated based on the total liabilities and total equity from the balance sheet. The total liabilities and equity sum to total assets, providing a balance sheet structure.
4. Construct and Format the Common-Size Balance Sheet
Using the calculated percentages, create columns in the spreadsheet for the absolute dollar figures and their corresponding percentages. Format this table for clarity, with clear labels and consistent decimal places, to facilitate analysis.
Analysis and Interpretation
The resulting common-size balance sheet allows for comparative analysis across different periods or companies. A high percentage of assets in net plant and equipment (over 60%) indicates a capital-intensive business. The proportion of current assets like cash and receivables offers insight into liquidity, while the liabilities as a percentage of total assets reflect leverage and financial risk.
Conclusion
Constructing a common-size balance sheet via spreadsheet enhances analytical capacity by standardizing financial data. Accurate calculation of percentages provides a basis for benchmarking and decision-making. The analyzed data reveals the company's asset composition, financing structure, and liquidity position, essential for stakeholders to assess financial health and operational efficiency.
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