Use This Balance Sheet And Income Statement From Carver Ente
Use this balance sheet and income statement from Carver Enterprises to complete parts a and b
a. (15 points) Prepare a common size balance sheet for Carver Enterprises. Complete the common-size balance sheet:
2013 Cash and marketable securities $ 490 %
Accounts receivable 5,990
Inventories 9,550
Current assets $ 16,030 %
Net property, plant, and equipment 17,030
Total assets $ 33,060 %
Accounts payable $ 7,220 %
Short-term debt 6,800
Current liabilities $ 14,020 %
Long-term liabilities 7,010
Total liabilities $ 21,030 %
Total owners’ equity 12,030
Total liabilities and owners’ equity $ 33,060 %
b. (15 points) Prepare a common-size income statement for Carver Enterprises. Complete the common-size income statement:
2013 Revenues $ 30,020 %
Cost of goods sold (19,950)
Gross profit $ 10,070 %
Operating expenses (7,960)
Net operating income $ 2,110 %
Interest expense (940)
Earnings before taxes $ 1,170 %
Taxes (425)
Net income $ 745 %
Paper For Above instruction
The task of analyzing a company's financial health through common size statements involves transforming raw financial data into proportional figures relative to total assets or sales, enabling comparison across companies regardless of size. In the case of Carver Enterprises, constructing a common size balance sheet and income statement provides a clearer picture of financial structure and operational efficiency, which are crucial to stakeholders such as managers, investors, and creditors.
Part a: Common Size Balance Sheet Analysis
To prepare the common size balance sheet for Carver Enterprises, each line item is expressed as a percentage of total assets. This conversion allows us to evaluate the composition of assets, liabilities, and equity. For instance, cash and marketable securities amount to $490, representing approximately 1.48% of total assets ($490 / $33,060). Accounts receivable at $5,990 accounts for about 18.12%, and inventories at $9,550 constitute roughly 28.88%. These percentages highlight the firm's liquid assets, receivables, and inventory holdings proportionally to its total assets, providing insight into its liquidity and operational focus.
On the liability side, accounts payable at $7,220 comprise about 21.85% of total assets, which indicates the relative magnitude of obligations owed to suppliers. Short-term debt at $6,800 accounts for approximately 20.56%, and combined current liabilities sum to 42.41%. Long-term liabilities, amounting to $7,010, represent approximately 21.21%, and total liabilities constitute roughly 63.75% of total assets, implying that Carver Enterprises relies significantly on debt financing. Equity at $12,030 stands at around 36.45%, indicating a balanced distribution between debt and equity financing.
By converting the balance sheet into common size format, stakeholders can assess whether the company's asset composition and leverage levels are consistent with industry norms or warrant strategic adjustments. For example, a high proportion of current liabilities might raise liquidity concerns, while a significant debt ratio could imply increased financial risk.
Part b: Common Size Income Statement Analysis
Transforming the income statement into common size involves expressing each line as a percentage of total sales revenue ($30,020). Cost of goods sold (COGS), at $19,950, accounts for approximately 66.44%, indicating the proportion of sales consumed by production costs. Gross profit of $10,070 is 33.56% of sales, reflecting gross margin. Operating expenses of $7,960 constitute about 26.55%, leaving a net operating income of approximately 7.05% of sales, which measures the company's efficiency in managing operating costs relative to revenue.
Interest expense at $940 accounts for roughly 3.13%. Earnings before taxes of $1,170 represent about 3.9%, and taxes at $425 are approximately 1.42%. This results in a net income of $745, about 2.48% of sales. These percentages reveal the company's profitability at various stages, with margins indicating how effectively the firm converts sales into profits after covering costs and expenses.
Analyzing these common size statements allows managers to identify areas of strength, such as the gross profit margin, and areas needing improvement, like operating expense management or reducing interest costs. Industry comparisons can further contextualize these figures, guiding strategic decisions to enhance overall financial performance.
In summary, the creation of common size financial statements for Carver Enterprises provides vital insights into its financial structure and operational efficiency. These tools facilitate better internal decision-making and enable stakeholders to make informed evaluations relative to industry standards, ultimately supporting strategic planning and financial health assessment.
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