Simon Company’s year-end balance sheets follow. At December 31 Current Yr 1 Yr Ago 2 Yrs Ago
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

Required:
a. Express the balance sheets in common-size percents.
b. Assuming annual sales have not changed in the last three years, is the change in accounts receivable as a percentage of total assets favorable or unfavorable?
c. Assuming annual sales have not changed in the last three years, is the change in merchandise inventory as a percentage of total assets favorable or unfavorable?

Simon Company

a. Expressing the balance sheets in common-size percents:

Simon Company's Year-end Balance Sheet:

At December 31               Current Yr  %       1 Yr Ago    %      2 Yrs Ago   %

Assets

Cash                                    $31,800    6%   $35,625     8%    $37,800   10%

Accounts receivable, net    89,500   17%      62,500    14%     50,200 13.3%

Merchandise inventory      112,500  22%      82,500    19%     54,000 14.3%

Prepaid expenses                10,700    2%         9,375     2%       5,000   1.3%

Plant assets, net               278,500   53%   255,000   57%  230,500  61.1%

Total assets                   $523,000  100% $445,000 100% $377,500  100%

Liabilities and Equity:

Accounts payable             $129,900 25%   $75,250    17%      $51,250  14%

Long-term notes payable    98,500  19%     101,500   23%      83,500  22%

Common stock, $10

par value                            163,500 31%     163,500   37%     163,500   43%

Retained earnings               131,100 25%     104,750   23%      79,250   21%

Total liabilities & equity $523,000 100% $445,000 100%  $377,500 100%

b. The change in accounts receivable has been unfavorable.  It has increased year on year, showing that the management has not improved on its collection policies and practices.  This conclusion is based on the assumption that annual sales have not changed in the last three years.

c. The change in merchandise inventory has been unfavorable.  It has increased in its percentages over total assets over the last three years.  It shows that the management is increasingly keeping excess inventory.  Again, this conclusion is based on the assumption that annual sales have not changed in the last three years.

Explanation:

a) Data and Calculations:

Simon Company's Year-end Balance Sheet:

At December 31               Current Yr           1 Yr Ago             2 Yrs Ago

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 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 & equity $523,000          $445,000            $377,500

b) The common-size percents are determined by taking a balance sheet account and expressing it as percentage of the total assets.  For example, the  common stock for the current year is $163,500.  When this is expressed as a percentage of total assets, which is equal to total liabilities and equity, we have it as 31% ($163,500/$523,000 * 100) approximately.

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