Docsity
Docsity

Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity


Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan


Guidelines and tips
Guidelines and tips

Vertical Analysis in Financial Statement Analysis, Lecture notes of Finance

Vertical Analysis about financial statement analysis techniques

Typology: Lecture notes

2016/2017

Uploaded on 12/24/2017

umut-ayik
umut-ayik 🇹🇷

5

(1)

5 documents

1 / 15

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
© The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide
14-1
Vertical Analysis
Vertical Analysis
Shows the relationship of items on the financial statement to a
base item ON THE SAME YEAR’S STATEMENT
Income statement base item is net sales
Balance sheet base item is total assets
Measures the relative size of items on the statement
Useful for comparing companies of different sizes
Useful for identifying trends in the same company over time
pf3
pf4
pf5
pf8
pf9
pfa
pfd
pfe
pff

Partial preview of the text

Download Vertical Analysis in Financial Statement Analysis and more Lecture notes Finance in PDF only on Docsity!

4- 1

Vertical Analysis

Vertical Analysis

 Shows the relationship of items on the financial statement to a

base item ON THE SAME YEAR’S STATEMENT

 Income statement base item is net sales

 Balance sheet base item is total assets

 Measures the relative size of items on the statement

 Useful for comparing companies of different sizes

 Useful for identifying trends in the same company over time

4- 2

Vertical Analysis...

Vertical Analysis...

…compares each item in a financial statement to a

base number set to 100%.

Every item on the financial statement is then

reported as a percentage of that base.

4- 4 VERTICAL ANALYSIS OF A BALANCE SHEET VERTICAL ANALYSIS OF A BALANCE SHEET Presented on the right is the 2-year comparative balance sheet of Quality Department Store Inc. for 1996 and 1995. 1 Current assets increased $75,000 from 1995 to 1996, they decreased from 59.2% to 55.6% of total assets. 2 Plant assets (net) increased from 39.7% to 43.6% of total assets, and 3 Retained earnings increased from 32.9% to 39.7% of total liabilities and stockholders’ equity. These results reinforce earlier observations that Quality is financing its growth through retention of earnings. Presented on the right is the 2-year comparative balance sheet of Quality Department Store Inc. for 1996 and 1995. 1 Current assets increased $75,000 from 1995 to 1996, they decreased from 59.2% to 55.6% of total assets. 2 Plant assets (net) increased from 39.7% to 43.6% of total assets, and 3 Retained earnings increased from 32.9% to 39.7% of total liabilities and stockholders’ equity. These results reinforce earlier observations that Quality is financing its growth through retention of earnings.

4- 5 VERTICAL ANALYSIS OF AN INCOME STATEMENT VERTICAL ANALYSIS OF AN INCOME STATEMENT Vertical analysis of the 2- year comparative income statement of Quality Department Store Inc. for 1996 and 1995 is shown on the right. 1 Cost of goods sold as a percentage of net sales declined 1% (62.1% versus 61.1%). 2 Total operating expenses declined 0.4% (17.4% versus 17.0%). 3 Net income as a percent of net sales therefore increased from 11.4% to 12.6%. Quality appears to be a profitable enterprise that is becoming more successful. Vertical analysis of the 2- year comparative income statement of Quality Department Store Inc. for 1996 and 1995 is shown on the right. 1 Cost of goods sold as a percentage of net sales declined 1% (62.1% versus 61.1%). 2 Total operating expenses declined 0.4% (17.4% versus 17.0%). 3 Net income as a percent of net sales therefore increased from 11.4% to 12.6%. Quality appears to be a profitable enterprise that is becoming more successful.

Vertical Analysis

Vertical Analysis

  • 4-
    • Revenues $38,303 100. 2005 %
    • Cost of sales 19,688 51.
    • Gross profit $18,615 48.
    • Total operating expenses 13,209 34.
    • Operating income $ 5,406 14.
    • Other income 2,187 5.
    • Income before taxes $ 7,593 19.
    • Income taxes 2,827 7.
    • Net income $ 4,766 12.

4- 8

Vertical Analysis

Vertical Analysis

Assets 2005 %

Current assets:

Cash $ 1,816 4.

Receivables net 10,438 26.

Inventories 6,151 15.

Prepaid expenses 3,526 9.

Total current assets $21,931 56.

Plant and equipment, net 6,847 17.

Other assets 9,997 25.

Total assets $38,775 100.

4- 10 CLOVER CORPORATION

Comparative Balance Sheets

December 31,

Common-size

Percents*

Assets

Current assets:

Cash and equivalents $ 12,000 $ 23,500 3.8% 8.1%

Accounts receivable, net 60,000 40,000 19.0% 13.8%

Inventory 80,000 100,000 25.4% 34.5%

Prepaid expenses 3,000 1,200 1.0% 0.4%

Total current assets $ 155,000 $ 164,700 49.2% 56.9%

Property and equipment:

Land 40,000 40,000 12.7% 13.8%

Buildings and equipment, net 120,000 85,000 38.1% 29.3%

Total property and equipment $ 160,000 $ 125,000 50.8% 43.1%

Total assets $ 315,000 $ 289,700 100.0% 100.0%

* Percent rounded to first decimal point.

13- 10

4- 11

CLOVER CORPORATION

Comparative Balance Sheets

December 31,

Dollar

Change

Percent

Change*

Assets

Current assets:

Cash and equivalents $ 12.000 $ 23.500 $ (11.500) -48,9%

Accounts receivable, net 60.000 40.000 20.000 50,0%

Inventory 80.000 100.000 (20.000) -20,0%

Prepaid expenses 3.000 1.200 1.800 150,0%

Total current assets $ 155.000 $ 164.700 (9.700) -5,9%

Property and equipment:

Land 40.000 40.000 - 0,0%

Buildings and equipment, net 120.000 85.000 35.000 41,2%

Total property and equipment $ 160.000 $ 125.000 35.000 28,0%

Total assets $ 315.000 $ 289.700 $ 25.300 8,7%

* Percent rounded to one decimal point.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 20 4- 13

CLOVER CORPORATION

Comparative Balance Sheets December 31, Common-size Percents* 2003 2002 2003 2002 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 67,000 $ 44, Notes payable 3,000 6, Total current liabilities $ 70,000 $ 50, Long-term liabilities: Bonds payable, 8% 75,000 80, Total liabilities $ 145,000 $130, Shareholders' equity: Preferred stock 20,000 20, Common stock 60,000 60, Additional paid-in capital 10,000 10, Total paid-in capital $ 90,000 $ 90, Retained earnings 80,000 69, Total shareholders' equity $ 170,000 $ 159, Total liabilities and shareholders' equity (^) $ 315,000 $ 289,

  • Percent rounded to first decimal point. Complete the common-size analysis for the liabilities and equity accounts.

CLOVER CORPORATION

Comparative Balance Sheets December 31, Changes 2003 2002

Change

Change Liabilities and Shareholders' 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 40,0% Long-term liabilities: Bonds payable, 8% 75.000 80.000 -5.000 -6,3% Total liabilities $ 145.000 $ 130.000 15.000 11,5% Shareholders' equity: Preferred stock 20.000 20.000 0 0,0% Common stock 60.000 60.000 0 0,0% Additional paid-in capital 10.000 10.000 0 0,0% Total paid-in capital $ 90.000 $ 90.000 0 0,0% Retained earnings 80.000 69.700 10.300 14,8% Total shareholders' equity $ 170.000 $ 159.700 10.300 6,4% Total liabilities and shareholders' equity (^) $ 315.000 $ 289.700 25.300 8,7%

  • Percent rounded to first decimal point. 13- 13

4- (^14) CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2003 2002 2003 2002 Revenues $ 520,000 $480, Costs and expenses: Cost of sales 360,000 315, Selling and admin. 128,600 126, Interest expense 6,400 7, Income before taxes $ 25,000 $ 32, Income taxes (30%) 7,500 9, Net income $ 17,500 $ 22, Net income per share $ 0.79 $ 1. Avg. # common shares 22,200 22,

  • Rounded to first decimal point. Compute the common-size percentages for revenues and expenses. CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, Common-size Percents* 2003 2002 2003 2002 Revenues $ 520,000 $ 480,000 100.0% 100.0% Costs and expenses: Cost of sales 360,000 315,000 69.2% 65.6% Selling and admin. 128,600 126,000 24.7% 26.3% Interest expense 6,400 7,000 1.2% 1.5% Income before taxes $ 25,000 $ 32,000 4.8% 6.7% Income taxes (30%) 7,500 9,600 1.4% 2.0% Net income $ 17,500 $ 22,400 3.4% 4.7% Net income per share $ 0.79 $ 1. Avg. # common shares 22,200 22,
  • Rounded to first decimal point. 13- 14