   Chapter 3, Problem 3.28EX ### Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

#### Solutions

Chapter
Section ### Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
1 views

# Vertical analysis of income statementThe following data (in millions) are taken from recent financial statements of Nike Inc.: a. Determine the amount of change (in millions) and percent of change in net income for Year 2. Round to one decimal place.b. Determine the percentage relationship between net income and net sales (net income divided by net sales) for Year 2 and Year 1. Round to one decimal place.c. What conclusions can you draw from your analysis?

(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. In the vertical analysis, the 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.

The amount and percentage of change in the net income from year 1 to year 2.

Explanation

The amount of change in net income from year 1 to year 2 is $90 million (1). And the percent of change in net income from year 1 to year 2 is 4.2% (2). Working notes: 1. Calculate the amount of change in net income from year 1 to year 2 Amountofchangeinnetincome=(Netincomeinyear2)(Netincomeinyear1)=$2,223$2,133=$90million (1)

2

(b)

To determine

The percentage relationship between net income and sales of year 2 and year 1.

(c)

To determine

To explain: The conclusion drawn from the analysis.

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