Problem 12-88B (Algorithmic) Using Common Size Statements Groff Graphics Company

Question

Problem 12-88B (Algorithmic)
Using Common Size Statements

Groff Graphics Company owns and operates a small chain of sportswear stores located near colleges and universities. Groff has experienced significant growth in recent years. The following data are available for Groff:

Required:

1. Calculate how much Groff's sales, net income, and assets have grown during these 3 years. Round your answers to the nearest whole percent.

2. Explain how Groff has financed the increase in assets.

Groff financed its asset growth through an increase in retained earnings and an increase in current liabilities.

3. Conceptual Connection: Is Groff's liquidity is adequate?
Yes

4. Conceptual Connection: Why is interest expense growing?

Because short-term notes payable is increasing.

5. If Groff's sales grow by 25% in 2020, what would you expect net income to be? Round your answer to the nearest dollar. Use your answer in the following calculations.
$

6. If Groff's assets must grow by 25% to support the 25% sales increase and if 50% of net income is paid in dividends, how much capital must Groff raise in 2020? Round your answer to the nearest cent.
$

Groff Graphics Company Consolidated Income Statement (In thousands) Year ended December 31, 2019 2018 2017 Sales $54,322 $42,893 $35,526 Cost of goods sold 32,936 25,682 21,721 Gross margin $21,386 $17,211 $13,805 Other income, net 397 439 421 $21,783 $17,650 $14,226 Costs and Expenses:       Selling and administrative $17,857 $14,665 $12,754       Interest 1,356 863 622 Total costs and expenses $19,213 $15,528 $13,376 Income before income taxes $ 2,570 $ 2,122 $ 850 Provision for income taxes 885 746 623 Net income $ 1,685 $ 1,376 $ 227

Explanation / Answer

Answer 5 :

If Sales increases by 25%, Sales figure for 2020= $54,322*125%= $67,903

Assuming continuation of Percentage of Net Income to sales like the previous year i.e. 3.10%, Net Income must be $67,903x3.10%= $2,106

Answer 6 :

New Total Asset amount=$16,347*125%=$20,434 (taking into account reduction in Cash due to payment of Dividened)

New Retained earnings=$3,169+$2,106/2=$4,222

Therefore Capital to be raised = Additional Retained earnings + Additional Total asset value=$3,037 approx

Answer 1:

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