PREPARATION OF COMMON SIZE STATEMENTS FOR VERTICAL ANALYSIS Financial statements for Apparel, Inc., appear below.

Apparel, Inc.

Consolidated Statements of Income

(In thousands except per share amounts)

2009 2008 2007 Net sales $ 7,245,088 $ 6,944,296 $ 6,149,218 Cost of goods sold (5,286,253) (4,953,556) (4,355,675)

Gross income $ 1,958,835 $ 1,990,740 $ 1,793,543 General and administrative expenses (1,259,896) (1,202,042) (1,080,843)

Special and nonrecurring items 2,617 — —

Operating income $ 701,556 $ 788,698 $ 712,700 Interest expense (63,685) (62,398) (63,927)

Other income 7,308 10,080 11,529 Gain on sale of investments — 9,117 —

Income before income taxes $ 645,179 $ 745,497 $ 660,302 Provision for income taxes 254,000 290,000 257,000 Net income $ 391,179 $ 455,497 $ 403,302 Net income per share $1.08 $1.25 $1.11 Apparel, Inc.

Consolidated Balance Sheets

(In thousands)

ASSETS Dec. 31, 2009 Dec. 31, 2008 Current assets:

Cash and equivalents $ 320,558 $ 41,235 Accounts receivable 1,056,911 837,377 Inventories 733,700 803,707 Other 109,456 101,811 Total current assets $2,220,625 $1,784,130 Property and equipment, net 1,666,588 1,813,948 Other assets 247,892 248,372 Total assets $4,135,105 $3,846,450 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable $ 250,363 $ 309,092 Accrued expenses 347,892 274,220 Certificates of deposit 15,700 —

Income taxes 93,489 137,466 Total current liabilities $ 707,444 $ 720,778 Long-term debt $ 650,000 $ 541,639 Deferred income taxes 275,101 274,844 Other long-term liabilities 61,267 41,572 Total liabilities $1,693,812 $1,578,833 LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholders’ equity:
Common stock $ 189,727 $ 189,727 Paid-in capital 128,906 127,776 Retained earnings 2,397,112 2,136,794 $2,715,745 $2,454,297 Less: Treasury stock, at cost (274,452) (186,680)
Total shareholders’ equity $2,441,293 $2,267,617 Total liabilities and shareholders’ equity $4,135,105 $3,846,450 Required:
. Prepare common size income statements and balance sheets for Apparel to be used in vertical analysis.
. Indicate whether gross margin grew as much as sales between 2007 and 2008 and between 2008 and 2009 and if so why it grew.
. Indicate whether the relative proportion of Apparel’s assets changed between 2008 and 2009 and if so, explain the change.
. Indicate whether the relative proportion of Apparel’s liabilities and equity changed between 2008 and 2009 and if so, explain the change.
. Explain how Apparel appears to have financed the 7.5 percent increase in assets that occurred between 2008 and 2009.
Exercise