Problem 4 - Accounting

Question

Balance sheet data for Hanes Company on December 31 , the end of the fiscal year, are shown below. $$ \begin{array}{lcr} & \mathbf{2 0 1 0} & {\mathbf{2 0 0 9}} \\ \hline \text { Current assets } & 320,000 & 200,000 \\ \text { Property, plant, and equipment } & 560,000 & 560,000 \\ \text { Intangible assets } & 120,000 & 40,000 \\ \text { Current liabilities } & 210,000 & 120,000 \\ \text { Long-term liabilities } & 350,000 & 300,000 \\ \text { Common stock } & 100,000 & 100,000 \\ \text { Retained earnings } & 340,000 & 280,000 \end{array} $$ Prepare a comparative balance sheet for 2010 and 2009, stating each asset as a percent of total assets and each liability and stockholders' equity item as a percent of the total liabilities and stockholders' equity. Round to one decimal place.

Step-by-Step Solution

Answer

2010's total assets were $1,000,000, and 2009's were $800,000. Total liabilities and equity equaled total assets for both years.

Step 1: Calculate Total Assets for Each Year

To analyze and compare, first calculate the total assets for each year. For 2010: Sum of Current Assets, Property, Plant, and Equipment, and Intangible Assets. \[ 320,000 + 560,000 + 120,000 = 1,000,000 \] For 2009: Sum of Current Assets, Property, Plant, and Equipment, and Intangible Assets. \[ 200,000 + 560,000 + 40,000 = 800,000 \]

Step 2: Calculate Total Liabilities and Stockholders' Equity for Each Year

To ensure the balance sheet balances, calculate total liabilities and stockholders' equity. For 2010: Combine Current Liabilities, Long-term Liabilities, Common Stock, and Retained Earnings. \[ 210,000 + 350,000 + 100,000 + 340,000 = 1,000,000 \] For 2009: Sum Current Liabilities, Long-term Liabilities, Common Stock, and Retained Earnings. \[ 120,000 + 300,000 + 100,000 + 280,000 = 800,000 \]

Step 3: Calculate Percentage of Total Assets for Each Asset

For each year, calculate the percentage contribution of each asset type to the total assets.2010:- Current Assets: \( \frac{320,000}{1,000,000} \times 100 = 32.0\% \)- Property, Plant, and Equipment: \( \frac{560,000}{1,000,000} \times 100 = 56.0\% \)- Intangible Assets: \( \frac{120,000}{1,000,000} \times 100 = 12.0\% \)2009:- Current Assets: \( \frac{200,000}{800,000} \times 100 = 25.0\% \)- Property, Plant, and Equipment: \( \frac{560,000}{800,000} \times 100 = 70.0\% \)- Intangible Assets: \( \frac{40,000}{800,000} \times 100 = 5.0\% \)

Step 4: Calculate Percentage of Total Liabilities and Stockholders’ Equity for Each Item

Now, find the percentage of each liability and stockholders' equity item relative to the total.2010:- Current Liabilities: \( \frac{210,000}{1,000,000} \times 100 = 21.0\% \)- Long-term Liabilities: \( \frac{350,000}{1,000,000} \times 100 = 35.0\% \)- Common Stock: \( \frac{100,000}{1,000,000} \times 100 = 10.0\% \)- Retained Earnings: \( \frac{340,000}{1,000,000} \times 100 = 34.0\% \)2009:- Current Liabilities: \( \frac{120,000}{800,000} \times 100 = 15.0\% \)- Long-term Liabilities: \( \frac{300,000}{800,000} \times 100 = 37.5\% \)- Common Stock: \( \frac{100,000}{800,000} \times 100 = 12.5\% \)- Retained Earnings: \( \frac{280,000}{800,000} \times 100 = 35.0\% \)

Key Concepts

Asset Percentage Analysis

When preparing a comparative balance sheet, an important step is to perform an Asset Percentage Analysis. This involves determining what portion of the total assets each individual asset category represents. It gives a clearer picture of where the company has allocated its resources, and how this allocation might have changed over time.

To start, calculate the total assets for each year. For example, in 2010, Hanes Company's total assets were \(1,000,000\) USD, made up of current assets, property, plant, and equipment, and intangible assets.

• **Current Assets**: Calculate the percentage by taking the current assets divided by the total assets. \(\frac{320,000}{1,000,000} \times 100 = 32.0\%\), indicating that 32% of assets were liquid and readily available for use.
• **Property, Plant, and Equipment (PPE)**: This was consistently \(56.0\%\) in 2010, showing a significant long-term investment in physical assets.
• **Intangible Assets**: In 2010, these were \(12.0\%\) of total assets, highlighting a considerable increase from 2009.

This breakdown provides insight into the company’s strategic focus. Higher percentages in current assets may indicate a focus on liquidity, while increases in intangible assets might suggest investment in future growth areas like patents or goodwill.

Liability Percentage Analysis

Liability Percentage Analysis is crucial to understanding a company's financial structure and risk exposure. It reveals how much of the company's assets are financed by liabilities, and how this proportion has shifted over time.

For instance, in 2010, Hanes Company had total liabilities of \(560,000\) USD, comprising both current and long-term liabilities. Here's how you can analyze the liabilities:

• **Current Liabilities**: By computing the percentage against total liabilities and equity, one finds it to be \(21.0\%\) for 2010, showing how much of current assets are funded by short-term obligations.
• **Long-term Liabilities**: Similarly, \(350,000\) in long-term debts amounted to \(35.0\%\) of the financing structure in 2010, indicating a reliance on long-term debt for funding significant capital investments.

The analysis provides a snapshot of how the company's debt structure is composed, helping potential stakeholders assess credit risk and financial stability. A higher vs. lower ratio of debt to assets will suggest different risk levels, influencing investor and lender decisions.

Stockholders' Equity Analysis

Stockholders’ Equity Analysis focuses on evaluating the proportion of total equity in the balance sheet. It shows the part of the company resources that the owners are financing themselves, contributing to long-term solvency strength.

Hanes Company's balance sheets for 2009 and 2010 demonstrate a steady structure of stockholders' equity. Here's a breakdown of this composition:

• **Common Stock**: Common stock remained stable at \(100,000\) for both years. For 2010, this represented \(10.0\%\) of total assets, reflecting consistency in the core shareholder investment.
• **Retained Earnings**: This amount encapsulates the cumulative profit kept within the company. It was \(34.0\%\) of 2010's financial structure, indicating that a solid portion of the profits was reinvested in company growth rather than distributed as dividends.

Analyzing equity helps in understanding how much the company’s net assets aren’t tied to debt obligations but instead to shareholder money. It offers insights into the strength and growth prospects of the business, especially valuable in evaluating the potential returns for equity holders.