Horizental and Vertical Analysis

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17-1

CHAPTER 17

ANALYSISAND

INTERPRETATION OF

FINANCIALSTATEMENTS


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17-2

Horizontal Analysis

Vertical Analysis

Trend Percentages

Methods ofFinancial Statement Analysis


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Horizontal Analysis

Using comparative financialstatements to calculate dollar

or percentage changes in afinancial statement item from

one period to the next


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17-4

Vertical Analysis

For a single financialstatement, each item

is expressed as apercentage of asignificant total,e.g., all income

statement items areexpressed as a

percentage of sales


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Common-Size Statements

Financial statements that showonly percentages and no

absolute dollar amounts


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Trend Percentages

Show changes over time ingiven financial statement items

(can help evaluate financialinformation of several years)


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Horizontal Analysis Example

The management of Clover Companyprovides you with comparative balancesheets of the years ended December 31,

1999 and 1998. Management asks you toprepare a horizontal analysis on the

information.
http://vrpacioli.loyola.edu/ac102/chapter17/14.ram


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17-8CLOVER CORPORATION

Comparative Balance Sheets

December 31, 1999 and 1998

1999 1998Assets

Current assets:

Cash 12,000$ 23,500$

Accounts receivable, net 60,000 40,000Inventory 80,000 100,000

Prepaid expenses 3,000 1,200

Total current assets 155,000 164,700

Property and equipment:

Land 40,000 40,000

Buildings and equipment, net 120,000 85,000

Total property and equipment 160,000 125,000

Total assets 315,000$ 289,700$
http://vrpacioli.loyola.edu/ac102/chapter17/14.ram


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17-9

Calculating Change in Dollar Amounts

Dollar

Change

Current Year

Figure

Base Year

Figure=



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Calculating Change in Dollar Amounts

Since we are measuring the amount ofthe change between 1998 and 1999, the

dollar amounts for 1998 become thebase year figures.

Dollar

Change

Current Year

Figure

Base Year

Figure=



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Calculating Change as a Percentage

Percentage

Change

Dollar Change

Base Year Figure 100%=



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CLOVER CORPORATIONComparative Balance Sheets


Increase (Decrease)

1999 1998 Amount %

Assets

Current assets: Cash 12,000$ 23,500$ (11,500)$

Accounts receivable, net 60,000 40,000

Inventory 80,000 100,000



Property and equipment: Land 40,000 40,000



Total assets 315,000$ 289,700$

$12,000$23,500 = $(11,500)


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CLOVER CORPORATIONComparative Balance Sheets


Increase (Decrease)

1999 1998 Amount %

Assets

Current assets: Cash 12,000$ 23,500$ (11,500)$ (48.9)

Accounts receivable, net 60,000 40,000

Inventory 80,000 100,000



Property and equipment: Land 40,000 40,000



Total assets 315,000$ 289,700$

($11,500 $23,500) 100% = 48.9%



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Lets apply the sameprocedures to the

liability and stockholdersequity sections of the

balance sheet.


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CLOVER CORPORATION

Comparative Balance Sheets


Increase (Decrease)1999 1998 Amount %

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable 67,000$ 44,000$ 23,000$ 52.3

Notes payable 3,000 6,000 (3,000) (50.0)

Total current liabilities 70,000 50,000 20,000 40.0Long-term liabilities:

Bonds payable, 8% 75,000 80,000 (5,000) (6.3)

Total liabilities 145,000 130,000 15,000 11.5

Stockholders' equity:

Preferred stock 20,000 20,000 - 0.0

Common stock 60,000 60,000 - 0.0 Additional paid-in capital 10,000 10,000 - 0.0

Total paid-in capital 90,000 90,000 - 0.0

Retained earnings 80,000 69,700 10,300 14.8

Total stockholders' equity 170,000 159,700 10,300 6.4

Total liabilities and stockholders' equity 315,000$ 289,700$ 25,300$ 8.7

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17-17

Now, lets apply the

procedures to theincome statement.


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CLOVER CORPORATION

Comparative Income StatementsFor the Years Ended December 31, 1999 and 1998

Increase (Decrease)

1999 1998 Amount %

Net sales 520,000$ 480,000$ 40,000$ 8.3

Cost of goods sold 360,000 315,000 45,000 14.3

Gross margin 160,000 165,000 (5,000) (3.0)

Operating expenses 128,600 126,000 2,600 2.1

Net operating income 31,400 39,000 (7,600) (19.5)

Interest expense 6,400 7,000 (600) (8.6)

Net income before taxes 25,000 32,000 (7,000) (21.9)

Less income taxes (30%) 7,500 9,600 (2,100) (21.9)

Net income 17,500$ 22,400$ (4,900)$ (21.9)

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CLOVER CORPORATION


Increase (Decrease)

1999 1998 Amount %

Net sales 520,000$ 480,000$ 40,000$ 8.3


Gross margin 160,000 165,000 (5,000) (3.0)






Net income 17,500$ 22,400$ (4,900)$ (21.9)

Sales increased by 8.3% while net

income decreased by 21.9%.

17-20


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CLOVER CORPORATION


Increase (Decrease)

1999 1998 Amount %

Net sales 520,000$ 480,000$ 40,000$ 8.3


Gross margin 160,000 165,000 (5,000) (3.0)






Net income 17,500$ 22,400$ (4,900)$ (21.9)

There were increases in both cost of goodssold (14.3%) and operating expenses (2.1%).These increased costs more than offset the

increase in sales, yielding an overalldecrease in net income.


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Sample CompanyBalance Sheet (Assets)

At December 31, 1999 and 1998

% of Total Assets

1999 1998 1999 1998Cash 82,000$ 30,000$ 17% 8%

Accts. Rec. 120,000 100,000 25% 26%

Inventory 87,000 82,000 18% 21%

Land 101,000 90,000 21% 23%Equipment 110,000 100,000 23% 26%

Accum. Depr. (17,000) (15,000) -4% -4%

Total 483,000$ 387,000$ 100% 100%

Vertical Analysis Example

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Vertical Analysis ExampleSample Company

Balance Sheet (Assets)


% of Total Assets

1999 1998 1999 1998Cash 82,000$ 30,000$ 17% 8%

Accts. Rec. 120,000 100,000 25% 26%

Inventory 87,000 82,000 18% 21%

Land 101,000 90,000 21% 23%Equipment 110,000 100,000 23% 26%

Accum. Depr. (17,000) (15,000) -4% -4%

Total 483,000$ 387,000$ 100% 100%

$82,000 $483,000 = 17% rounded

$30,000 $387,000 = 8% rounded

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Sample Company

Balance Sheet (Liabilities & Stockholders' Equity)


% of Total Assets

1999 1998 1999 1998Acts. Payable 76,000$ 60,000$ 16% 16%

Wages Payable 33,000 17,000 7% 4%

Notes Payable 50,000 50,000 10% 13%

Common Stock 170,000 160,000 35% 41%Retained Earnings 154,000 100,000 32% 26%

Total 483,000$ 387,000$ 100% 100%

Vertical Analysis Example

$76,000 $483,000 = 16% rounded

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5

Trend Percentages Example

Wheeler, Inc. provides you with thefollowing operating data and asks that

you prepare a trend analysis.

Wheeler, Inc.

Operating Data

1999 1998 1997 1996 1995

Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$

Expenses 2,033 1,966 1,870 1,803 1,701Net income 372$ 278$ 242$ 188$ 119$

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Wheeler, Inc. provides you with thefollowing operating data and asks that

you prepare a trend analysis.

Wheeler, Inc.

Operating Data

1999 1998 1997 1996 1995

Revenues 2,405$ 2,244$ 2,112$ 1,991$ 1,820$

Expenses 2,033 1,966 1,870 1,803 1,701Net income 372$ 278$ 242$ 188$ 119$

$1,991 - $1,820 = $171

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Using 1995 as the base year, we developthe following percentage relationships.

Wheeler, Inc.

Operating Data1999 1998 1997 1996 1995

Revenues 132% 123% 116% 109% 100%

Expenses 120% 116% 110% 106% 100%

Net income 313% 234% 203% 158% 100%

$1,991 - $1,820 = $171

$171 $1,820 = 9% rounded

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90

100

110

120

130

140

1995 1996 1997 1998 1999

Years

%

of100Base

Sales

Expenses

Trend line

for Sales

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Horizental and Vertical Analysis

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