Prepare the 2009 combined common-size, common-base year balance sheet for Just Dew It.
The correct answer and explanation is :
To prepare a combined common-size and common-base year balance sheet for Just Dew It (assuming this is a hypothetical company), we need to follow a structured process. Here’s how we would approach it:
Step 1: Understand the Common-Size and Common-Base Year Concepts
- Common-Size Balance Sheet: In a common-size balance sheet, each item is expressed as a percentage of total assets. This allows for easier comparison across time periods or companies of different sizes. The formula for a common-size balance sheet item is:
[
\text{Common-Size Percentage} = \left(\frac{\text{Account Value}}{\text{Total Assets}}\right) \times 100
] - Common-Base Year Balance Sheet: In a common-base year balance sheet, each line item is compared to a base year value. The base year is typically set to 100%, and each subsequent year is expressed as a percentage change from the base year. [
\text{Common-Base Year Percentage} = \left(\frac{\text{Item Value in Current Year}}{\text{Item Value in Base Year}}\right) \times 100
]
Step 2: Create the Balance Sheet
Assume the following balance sheet values for 2009 (in thousands of dollars) and 2008 (base year):
2008 (Base Year):
| Assets | Amount | Liabilities and Equity | Amount |
|---|---|---|---|
| Cash | 50 | Accounts Payable | 60 |
| Accounts Receivable | 80 | Long-Term Debt | 100 |
| Inventory | 120 | Shareholder Equity | 90 |
| Total Assets | 250 | Total Liabilities & Equity | 250 |
2009:
| Assets | Amount | Liabilities and Equity | Amount |
|---|---|---|---|
| Cash | 70 | Accounts Payable | 80 |
| Accounts Receivable | 100 | Long-Term Debt | 120 |
| Inventory | 130 | Shareholder Equity | 100 |
| Total Assets | 300 | Total Liabilities & Equity | 300 |
Step 3: Common-Size (2009)
For the common-size balance sheet, we calculate the percentage of total assets for each item.
| Assets | Amount (2009) | % of Total Assets |
|---|---|---|
| Cash | 70 | 23.33% |
| Accounts Receivable | 100 | 33.33% |
| Inventory | 130 | 43.33% |
| Total Assets | 300 | 100% |
| Liabilities and Equity | Amount (2009) | % of Total Liabilities & Equity |
|---|---|---|
| Accounts Payable | 80 | 26.67% |
| Long-Term Debt | 120 | 40% |
| Shareholder Equity | 100 | 33.33% |
| Total Liabilities & Equity | 300 | 100% |
Step 4: Common-Base Year (2009 Compared to 2008)
For the common-base year, we express 2009 as a percentage of 2008 for each item:
| Assets | 2008 Amount | 2009 Amount | Common-Base Year Percentage |
|---|---|---|---|
| Cash | 50 | 70 | 140% |
| Accounts Receivable | 80 | 100 | 125% |
| Inventory | 120 | 130 | 108.33% |
| Total Assets | 250 | 300 | 120% |
| Liabilities and Equity | 2008 Amount | 2009 Amount | Common-Base Year Percentage |
|---|---|---|---|
| Accounts Payable | 60 | 80 | 133.33% |
| Long-Term Debt | 100 | 120 | 120% |
| Shareholder Equity | 90 | 100 | 111.11% |
| Total Liabilities & Equity | 250 | 300 | 120% |
Step 5: Explanation
Common-Size Balance Sheet: The common-size analysis for 2009 shows that cash represents 23.33% of total assets, accounts receivable accounts for 33.33%, and inventory is 43.33%. This format helps to easily compare how assets are distributed across different categories, showing that the company has a large portion of assets tied up in inventory.
Common-Base Year Balance Sheet: The common-base year analysis compares 2009 to 2008, indicating that total assets have grown by 20%, cash has increased by 40%, and inventory has increased by 8.33%. This percentage comparison shows the overall growth and changes in the company’s financial structure, highlighting a significant increase in cash and accounts receivable.
In summary, combining these two approaches allows for a comprehensive understanding of the company’s financial performance over time and how its financial structure has evolved.