Bob Cleary, the controller of Mountain-Pacific Railroad, has prepared the following financial statements for 1996 and 1997. The market prices of the company’s stock as ofJanuary 1, 1996, December 31, 1996, and December 31, 1997, were $50, $45, and $70 per share, respectively. Assume an income tax rate of 34 percent and assume that interest expense was incurred only on long-term debt (including the current maturities of long-term debt). Balance Sheet 1997 1996 Assets Current assets: Cash $ 10,000 $ 312,000 Short-term marketable securities 125,000 120,000 Accounts receivable 500,000 150,000 Inventory 200,000 210,000 Prepaid expenses 50,000 75,000 Total current assets $ 885,000 $ 867,000 Long-term investments 225,000 225,000 Property, plant, and equipment 430,000 540,000 Less: Accumulated depreciation (65,000) (100,000) Total assets $1,475,000 $1,532,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 10,000 $ 50,000 Wages payable 5,000 2,000 Dividends payable 125,000 5,000 Income taxes payable 50,000 35,000 Current portion of long-term debt 100,000 175,000 Total current liabilities $ 290,000 $ 267,000 Mortgage payable 350,000 450,000 Common stock ($10 par value) 200,000 110,000 Additional paid-in capital 135,000 95,000 Retained earnings 500,000 610,000 Total liabilities and stockholders’ equity $1,475,000 $1,532,000 Income Statement 1997 1996 Revenue: Net cash sales $1,955,000 $2,775,000 Net credit sales Total revenue 4,150,000 $6,105,000 1,410,000 $4,185,000 Cost of goods sold: Beginning inventory $ 210,000 $ 300,000 Net purchases Cost of goods available 4,005,000 2,475,000 for sale $4,215,000 $2,775,000 Less: Ending inventory 200,000 210,000 Cost of goods sold 4,015,000 2,565,000 Gross profit $2,090,000 $1,620,000 Income Statement 1997 1996 $2,090,000 75,000 575,000 480,000 1,130,000 $1,620,000 $ 90,000 600,000 420,000 1,110,000 Gross profit (brought fwd.) Selling and administrative expenses: Depreciation expense $ General selling expenses General administrative expenses Net operating income Interest expense Net income from continuing operations before taxes Income taxes Net income before unusual items Unusual loss—net of tax benefit of $60,000 Net income Statement of Retained Earnings Beginning retained earnings balance Plus: Net income Less: Dividends Ending retained earnings balance $ 960,000 $ 510,000 50,000 65,000 $ 910,000 310,000 $ 445,000 151,000 $ 600,000 $ 294,000 115,000 — $ 485,000 $ 294,000 1997 1 996 $ 610,000 485,000 595,000 $ 500,000 $ 326,000 294,000 10,000 $ 610,000 REQUIRED:

a. Prepare common-size balance sheets and income statements for 1996 and 1997 and ana¬ lyze the results.

b. Which income statement account experienced the largest shift from 1996 to 1997? Did this shift appear to have any impact on the balance sheet? Explain.

c. What benefits do common-size financial statements provide over standard financial state¬ ments?