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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Vertical analysis

Two income statements for Hemlock Company follow:

Chapter 3, Problem 3.10APE, Vertical analysis Two income statements for Hemlock Company follow: a. Prepare a vertical analysis

a. Prepare a vertical analysis of Hemlock Company’s income statements.

b. Does the vertical analysis indicate a favorable or an unfavorable trend?

(a)

To determine

Vertical analysis:

Vertical analysis is the method of financial statement analysis, and it is useful to evaluating a company’s performance and financial condition. Vertical analysis is helpful for analyzing the changes in the financial statements over the time, and comparing the each item on a financial statement with a total amount from the same statement. Financial statements are analyzed in the following manner:

  • In vertical analysis of a balance sheet, each asset item is stated as a percent of the total asset, and each liability and owner’s equity item is stated as a percent of total liabilities and owner’s equity.
  • In vertical analysis of an income statement, each item of revenue and expense is stated as a percent of total revenues of the business.

To prepare: The vertical analysis of Company H’s income statement.

Explanation

The vertical analysis of Company H’s income statement is as follows:

Company H
Income statement
For the year ended December, 31
Particulars 2016 2015
Amount ($) Percent Amount ($) Percent
Fees earned (A) 725,000 100%      615,000 100%
Operating expense (B) 435,000 60%      356,700 58%

(b)

To determine

To indicate:  The favorable or an unfavorable trend of the vertical analysis.

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