1.
Prepare horizontal analysis of the comparative income statement and balance sheet.
1.
Explanation of Solution
Ratio analysis: The analysis of a company using the financial ratios and comparing its trends and measure its performance within the company and the companies of the industry is known as ratio analysis. The main categories of ratio analyses are liquidity ratios, profitability ratios, activity ratios, and leverage ratios.
Horizontal analysis: The comparison of an item of a financial statement of one year against the same item of the same financial statement of another year, to determine the relation between the two items, is referred to as horizontal analysis. The horizontal analysis percentage is calculated by using the given formula:
Prepare horizontal analysis of the comparative income statement of Company NPC.
Company CPC | ||||
Comparative Income Statement | ||||
For the Year Ended December 31, 20-2 and 20-1 | ||||
Particulars |
20-2 (A) |
20-1 (B) | Increase (Decrease) | |
Amount (C) | Percentage (C÷B)×100 | |||
Net sales | $466,451 | $291,613 | $174,838 | 60.0 |
Cost of goods sold | $285,889 | $188,626 | $97,263 | 51.6 |
Gross Profit | $180,562 | $102,987 | $77,575 | 75.3 |
operating expenses | $125,650 | $78,200 | $47,450 | 60.7 |
Operating income | $54,912 | $24,787 | $30,125 | 121.5 |
Interest expenses | $1,200 | $500 | $700 | 140.0 |
Income before income taxes | $53,712 | $24,287 | $29,425 | 121.2 |
Income tax expense | $18,250 | $7,285 | $10,965 | 150.5 |
Net income | $35,462 | $17,002 | $18,460 | 108.6 |
Table (1)
Prepare horizontal analysis of the comparative balance sheet of Company NPC.
Company NPC | ||||
Comparative Balance Sheet | ||||
For the Year Ended December 31, 20-2 and 20-1 | ||||
Particulars |
20-2 (A) |
20-1 (B) | Increase (Decrease) | |
Amount (C) | Percentage (C÷B)×100 | |||
Assets | ||||
Current assets: | ||||
Cash | $8,600 | $7,500 | $1,100 | 14.7 |
Government notes | $3,000 | $2,000 | $1,000 | 50.0 |
Receivables (net) | $10,500 | $8,600 | $1,900 | 22.1 |
Merchandise inventory | $53,600 | $33,200 | $20,400 | 61.4 |
Supplies and prepayments | $4,500 | $3,200 | $1,300 | 40.6 |
Total current assets | $80,200 | $54,500 | $25,700 | 47.2 |
Property, plant and equipment: | ||||
Land | $40,000 | $40,000 | $0 | 0.0 |
Building | $200,000 | $150,000 | $50,000 | 33.3 |
Delivery equipment | $13,000 | $15,000 | ($2,000) | -13.3 |
Office equipment (net) | $5,400 | $6,000 | ($600) | -10.0 |
Patents | $5,000 | $6,000 | ($1,000) | -16.7 |
Factory equipment (net) | $200,000 | $52,930 | $147,070 | 277.9 |
Total property, plant and equipment | $263,400 | $217,000 | $46,400 | 21.4 |
Total Assets | $343,600 | $271,500 | $72,100 | 26.6 |
Liabilities | ||||
Current liabilities: | ||||
Notes payable | $5,000 | $3,000 | $2,000 | 66.7 |
Accounts payable | $28,700 | $22,300 | $6,400 | 28.7 |
Accrued interest payable | $500 | $1,700 | ($1,200) | -70.6 |
Accrued and withheld payment taxes | $4,200 | $5,600 | ($1,400) | -25.0 |
Total current liabilities | $38,400 | $32,600 | $5,800 | 17.8 |
Long-term liabilities: | ||||
Bonds payable | $50,000 | $20,000 | $30,000 | 150.0 |
Total liabilities | $88,400 | $52,600 | $35,800 | 68.1 |
Common stock | $115,000 | $100,000 | $15,000 | 15.0 |
Paid in capital in excess of par | $65,000 | $60,000 | $5,000 | 8.3 |
$75,200 | $58,900 | $16,300 | 27.7 | |
Total stockholders' equity | $255,200 | $218,900 | $36,300 | 16.6 |
Total liabilities and stockholders' equity | $343,600 | $271,500 | $72,100 | 26.6 |
Table (2)
2.
Prepare vertical analysis of the comparative income statement and balance sheet of Company NPC.
2.
Explanation of Solution
Vertical Analysis: Vertical analysis is prepared to analyze the relationship among various financial statements with a particular base amount. This analysis is otherwise called as common-size statement.
Formula:
Prepare vertical analysis of the comparative income statement of Company NPC.
Company NPC | ||||
Comparative Income Statement | ||||
For Years Ended December 31, 20-2 and 20-1 | ||||
Particulars | 20-2 | 20-1 | ||
Amount | percent | Amount | Percent | |
Net sales | $466,451 | 100% | $291,613 | 100% |
Cost of goods sold | 285,889 | 61.30% | 188,626 | 64.70% |
Gross profit | $180,562 | 38.70% | $102,987 | 35.30% |
Operating expenses | 125,650 | 26.90% | 78,200 | 26.80% |
Operating income | $54,912 | 11.80% | $24,787 | 8.50% |
Other expenses | 1,200 | 0.30% | 500 | 0.20% |
Income before income taxes | $53,712 | 11.50% | $24,287 | 8.30% |
Income tax expense | 18,250 | 3.90% | 7,285 | 2.50% |
Net income | $35,462 | 7.60% | $17,002 | 5.80% |
Table (3)
Prepare vertical analysis of the comparative balance sheet of Company NPC.
Company NPC | ||||
Comparative Balance Sheet | ||||
December 31, 20-2 and 20-1 | ||||
20-2 | 20-1 | |||
Amount | Percent | Amount | Percent | |
Assets | ||||
Current assets: | ||||
Cash | $8,600 | 2.50% | $7,500 | 2.80% |
Government notes | 3,000 | 0.90% | 2,000 | 0.70% |
| 10,500 | 3.10% | 8,600 | 3.20% |
Merchandise inventory | 53,600 | 15.60% | 33,200 | 1.20% |
Supplies and prepayments | 4,500 | 1.30% | 3,200 | 1.20% |
Total current assets | $80,200 | 23.30% | $54,500 | 20.10% |
Property, plant, and equipment: | ||||
Land | $40,000 | 11.60% | $40,000 | 14.70% |
Building (net) | 200,000 | 58.20% | 150,000 | 55.20% |
Delivery equipment (net) | 13,000 | 3.80% | 15,000 | 5.50% |
Office equipment (net) | 5,400 | 1.60% | 6,000 | 2.20% |
Patents | 5,000 | 1.50% | 6,000 | 2.20% |
Total property, plant, and equipment | $263,400 | 76.70% | $217,000 | 79.90% |
Total assets | $343,600 | 100% | $271,500 | 100% |
Liabilities | ||||
Current liabilities: | ||||
Notes payable | $5,000 | 1.50% | $3,000 | 1.10% |
Accounts payable | 28,700 | 8.40% | 22,300 | 8.20% |
Accrued and withheld payroll taxes | 4,200 | 1.20% | 5,600 | 2.10% |
Accrued interest payable | 500 | 0.10% | 1,700 | 0.60% |
Total current liabilities | $38,400 | 11.20% | $32,600 | 12% |
Long-term liabilities: | ||||
Bonds payable | 50,000 | 14.60% | 20,000 | 7.40% |
Total liabilities | $88,400 | 25.70% | $52,600 | 19.40% |
Stockholders’ Equity | ||||
Common stock ($5 par) | $115,000 | 33.50% | $100,000 | 36.80% |
Paid-in capital in excess of par | 65,000 | 18.90% | 60,000 | 22.10% |
Retained earnings | 75,200 | 21.90% | 58,900 | 21.70% |
Total stockholders’ equity | $255,200 | 74.30% | $218,900 | 80.60% |
Total liabilities and stockholders' equity | $343,600 | 100% | $271,500 | 100% |
Table (4)
3.
Compute the following liquidity measures for 20-2.
- (a)
Working capital - (b)
Current ratio - (c) Quick or acid –test ratio
3.
Explanation of Solution
Liquidity measures:
Liquidity measures denote a company’s capacity to meet its current liabilities. These measures focus on balance sheet amounts initially and on the ability of the company to generate funds to liquidate its current obligations.
(a)
Calculate working capital on December 31, 20-2.
(b)
Calculate current ratio on December 31, 20-2.
(c)
Calculate quick or acid test ratio on December 31, 20-2.
4.
Activity measures:
Activity measures initially focus on how efficiently the assets are used. For example, the speed of the receivables collected and inventories sold, as well as the usage of the assets to generate revenue.
Calculate the following activity measures for 20-2.
- (a) Accounts receivable and average number of days to collect.
- (b) Merchandise inventory turnover and average number of days to sell inventory.
- (c) Asset turnover
4.
Explanation of Solution
(a)
Calculate accounts receivable turnover.
Calculate average collection period.
(b)
Calculate merchandise inventory turnover.
Calculate average days to sell inventory.
(c)
Calculate asset turnover.
5.
Compute the following profitability measures for 20-2.
- (a) Profit margin ratio
- (b) Return on assets
- (c) Return on common stockholders’ equity
- (d) Earnings per share of common stock
5.
Explanation of Solution
Profitability measures:
Profitability measures show the ability of the company to earn income by operating proficiently (satisfactory return on investments). These ratios focus upon company’s’ profit margin and “the relationship between key income statement and balance sheet amounts”. Profit margin, return-on-assets, return on common stockholders’ equity, earnings per share of common stock are the profitability ratios.
(a)
Calculate profit margin ratio.
(b)
Calculate return on assets for 20-2.
(c)
Calculate return on common stockholders’ equity for 20-2.
(d)
Calculate earnings per share of common stock.
Calculate beginning common shares outstanding.
Calculate ending common shares outstanding.
6.
Leverage measures:
Leverage measures overlook the mixture of debt and equity which is required for analyzing the ability of the Company to meet its debt obligations as they become due. Debt to equity ratio: Assets-to-equity ratio, Times interest earned ratio are the leverage measures.
Compute the following leverage ratios.
- (a) Debt-to-equity ratio
- (b) Times interest earned ratio.
6.
Explanation of Solution
(a)
Calculate debt-to-equity ratio.
(b)
Calculate times interest earned ratio.
7.
Calculate the following market measures for 20-2.
- (a) Price earnings ratio
- (b) Book value per share of common stock.
7.
Explanation of Solution
(a)
Calculate price earnings ratio.
(b)
Calculate book value per share of common stock.
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Chapter 24 Solutions
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