Horizontal Analysis for Income Statement

For 20Y3, Greyhound Technology Company reported its most significant decline in net income in years. At the end of the year, Duane Vogel, the president, is presented with the following condensed comparative income statement:

GREYHOUND TECHNOLOGY COMPANY
Comparative Income Statement
For the Years Ended December 31, 20Y3 and 20Y2 20Y3 20Y2 Sales $ 862,000 $ 785,000 Cost of goods sold (650,000) (500,000) Gross profit $ 212,000 $ 285,000 Selling expenses $ (44,000) $ (40,000) Administrative expenses (27,000) (25,000) Total operating expenses $ (71,000) $ (65,000) Income from operations $ 141,000 $ 220,000 Other revenue 2,300 2,000 Income before income tax $ 143,300 $ 222,000 Income tax expense (13,000) (20,000) Net income $ 130,300 $ 202,000

Instructions:

1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y2 as the base year. Enter decreases as negative amounts and negative percentages. Round percentage changes to one decimal place.

Greyhound Technology Company Comparative Income Statement
For the Years Ended December 31, 20Y3 and 20Y2

20Y3
20Y2 Increase (Decrease)
Amount Increase (Decrease)
Percent Sales $862,000 $785,000 $fill in the blank d02aeff75fbafce_1 fill in the blank d02aeff75fbafce_2% Cost of goods sold (650,000) (500,000) fill in the blank d02aeff75fbafce_3 fill in the blank d02aeff75fbafce_4% Gross profit $212,000 $285,000 $fill in the blank d02aeff75fbafce_5 fill in the blank d02aeff75fbafce_6% Selling expenses $(44,000) $(40,000) $fill in the blank d02aeff75fbafce_7 fill in the blank d02aeff75fbafce_8% Administrative expenses (27,000) (25,000) fill in the blank d02aeff75fbafce_9 fill in the blank d02aeff75fbafce_10% Total operating expenses $(71,000) $(65,000) $fill in the blank d02aeff75fbafce_11 fill in the blank d02aeff75fbafce_12% Income from operations $141,000 $220,000 $fill in the blank d02aeff75fbafce_13 fill in the blank d02aeff75fbafce_14% Other revenue 2,300 2,000 fill in the blank d02aeff75fbafce_15 fill in the blank d02aeff75fbafce_16% Income before income tax $143,300 $222,000 $fill in the blank d02aeff75fbafce_17 fill in the blank d02aeff75fbafce_18% Income tax expense (13,000) (20,000) fill in the blank d02aeff75fbafce_19 fill in the blank d02aeff75fbafce_20% Net income $130,300 $202,000 $fill in the blank d02aeff75fbafce_21 fill in the blank d02aeff75fbafce_22%

2. Based on the horizontal analysis prepared in 1 which of the following statements is correct?
a. Net income declined from 20Y2 to 20Y3.
b. Sales increased, but the cost of goods also increased causing gross profit to decline.
c. Other revenues decreased slightly and income tax expense increased.
d. Overall net income increased.

a and b a and c a and d All of the above

For 20Y6, Fishing Experiences Inc. initiated a sales promotion campaign that included the expenditure of an additional $45,000 for advertising. At the end of the year, Colt Schultz, the president, is presented with the following condensed comparative income statement:

FISHING EXPERIENCES INC.
Comparative Income Statement
For the Years Ended December 31, 20Y6 and 20Y5 20Y6 20Y5 Sales $1,200,000 $1,000,000 Cost of goods sold (624,000) (558,000) Gross profit $ 576,000 $ 442,000 Selling expenses (120,000) (75,000) Administrative expenses (50,000) (50,000) Total operating expenses $ (170,000) $ (125,000) Operating income $ 406,000 $ 317,000 Other revenue 30,000 30,000 Income before income tax $ 436,000 $ 347,000 Income tax expense (100,000) (90,000) Net income $ 336,000 $ 257,000

Instructions:

1. Prepare a comparative income statement for the two-year period, presenting a vertical analysis of each item in relationship to sales for each of the years. Round percentages to one decimal place.

Fishing Experiences Inc. Comparative Income Statement
For the Years Ended December 31, 20Y6 and 20Y5
20Y6 Amount 20Y6 Percent 20Y5 Amount 20Y5 Percent Sales $1,200,000 fill in the blank b1c29eff7003f84_1% $1,000,000 fill in the blank b1c29eff7003f84_2% Cost of goods sold (624,000) fill in the blank b1c29eff7003f84_3% (558,000) fill in the blank b1c29eff7003f84_4% Gross profit $576,000 fill in the blank b1c29eff7003f84_5% $442,000 fill in the blank b1c29eff7003f84_6% Selling expenses $(120,000) fill in the blank b1c29eff7003f84_7% $(75,000) fill in the blank b1c29eff7003f84_8% Administrative expenses (50,000) fill in the blank b1c29eff7003f84_9% (50,000) fill in the blank b1c29eff7003f84_10% Total operating expenses $(170,000) fill in the blank b1c29eff7003f84_11% $(125,000) fill in the blank b1c29eff7003f84_12% Operating income $406,000 fill in the blank b1c29eff7003f84_13% $317,000 fill in the blank b1c29eff7003f84_14% Other revenue 30,000 fill in the blank b1c29eff7003f84_15% 30,000 fill in the blank b1c29eff7003f84_16% Income before income tax $436,000 fill in the blank b1c29eff7003f84_17% $347,000 fill in the blank b1c29eff7003f84_18% Income tax expense (100,000) fill in the blank b1c29eff7003f84_19% (90,000) fill in the blank b1c29eff7003f84_20% Net income $336,000 fill in the blank b1c29eff7003f84_21% $257,000 fill in the blank b1c29eff7003f84_22%

2. Based on the vertical analysis prepared in 1 which of the following statements is correct?
a. Costs other than selling expenses (cost of goods sold and administrative expenses) improved as a percentage of sales.
b. Net income as a percentage of sales increased.
c. The sales promotion campaign appears to have been successful.
d. Selling expenses as a percent of sales increased slightly

a and b a and c a and d All of the above

eBook

Effect of Transactions on Current Position Analysis

Data pertaining to the current position of Newlan Company are as follows:

Cash $ 80,000 Temporary investments 160,000 Accounts and notes receivable (net) 235,000 Inventories 190,000 Prepaid expenses 10,000 Accounts payable 158,000 Notes payable (short-term) 80,000 Accrued expenses 12,000

Instructions:

1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round the current ratio and the quick ratio to one decimal place.

Working capital $fill in the blank 1 Current ratio fill in the blank 2 Quick ratio fill in the blank 3

2. Compute the working capital, the current ratio, and the quick ratio after each of the following transactions, and record the results in the appropriate columns. Consider each transaction separately and assume that only that transaction affects the data given above. Format working capital as whole dollars. Round the current ratio and the quick ratio to one decimal place.

Transaction Working Capital Current Ratio Quick Ratio a. Sold temporary investments for cash at no gain or loss, $50,000. $fill in the blank 4 fill in the blank 5 fill in the blank 6 b. Paid accounts payable, $40,000. $fill in the blank 7 fill in the blank 8 fill in the blank 9 c. Purchased goods on account, $75,000. $fill in the blank 10 fill in the blank 11 fill in the blank 12 d. Paid notes payable, $30,000. $fill in the blank 13 fill in the blank 14 fill in the blank 15 e. Declared a cash dividend, $15,000. $fill in the blank 16 fill in the blank 17 fill in the blank 18 f. Declared a stock dividend on common stock, $24,000. $fill in the blank 19 fill in the blank 20 fill in the blank 21 g. Borrowed cash from bank on a long-term note, $150,000. $fill in the blank 22 fill in the blank 23 fill in the blank 24 h. Received cash on account, $72,000. $fill in the blank 25 fill in the blank 26 fill in the blank 27 i. Issued additional shares of stock for cash, $300,000. $fill in the blank 28 fill in the blank 29 fill in the blank 30 j. Paid cash for prepaid expenses, $10,000. $fill in the blank 31 fill in the blank 32 fill in the blank 33

eBook

Twenty metrics of liquidity, Solvency, and Profitability

The comparative financial statements of Automotive Solutions Inc. are as follows. The market price of Automotive Solutions Inc. common stock was $119.70 on December 31, 20Y8.

AUTOMOTIVE SOLUTIONS INC.
Comparative Income Statement
For the Years Ended December 31, 20Y8 and 20Y7 20Y8 20Y7 Sales $10,000,000 $ 9,400,000 Cost of goods sold (5,350,000) (4,950,000) Gross profit $ 4,650,000 $ 4,450,000 Selling expenses $ (2,000,000) $(1,880,000) Administrative expenses (1,500,000) (1,410,000) Total operating expenses $ (3,500,000) $(3,290,000) Operating income $ 1,150,000 $ 1,160,000 Other revenue and expense: Other revenue 150,000 140,000 Other expense (interest) (170,000) (150,000) Income before income tax $ 1,130,000 $ 1,150,000 Income tax expense (230,000) (225,000) Net income $ 900,000 $ 925,000
AUTOMOTIVE SOLUTIONS INC.
Comparative Statement of Stockholders’ Equity
For the Years Ended December 31, 20Y8 and 20Y7 20Y8 20Y7 Preferred
Stock Common
Stock Retained
Earnings Preferred
Stock Common
Stock Retained
Earnings Balances, Jan. 1 $500,000 $500,000 $5,375,000 $500,000 $500,000 $4,545,000 Net income 900,000 925,000 Dividends: Preferred stock (45,000) (45,000) Common stock (50,000) (50,000) Balances, Dec. 31 $500,000 $500,000 $6,180,000 $500,000 $500,000 $5,375,000
AUTOMOTIVE SOLUTIONS INC.
Comparative Balance Sheet
December 31, 20Y8 and 20Y7 Dec. 31, 20Y8 Dec. 31, 20Y7 Assets Current assets: Cash $ 500,000 $ 400,000 Marketable securities 1,010,000 1,000,000 Accounts receivable (net) 740,000 510,000 Inventories 1,190,000 950,000 Prepaid expenses 250,000 229,000 Total current assets $3,690,000 $3,089,000 Long-term investments 2,350,000 2,300,000 Property, plant, and equipment (net) 3,740,000 3,366,000 Total assets $9,780,000 $8,755,000 Liabilities Current liabilities $ 900,000 $ 880,000 Long-term liabilities: Mortgage note payable, 10% $ 200,000 $ 0 Bonds payable, 10% 1,500,000 1,500,000 Total long-term liabilities $1,700,000 $1,500,000 Total liabilities $2,600,000 $2,380,000 Stockholders’ Equity Preferred $0.90 stock, $10 par $ 500,000 $ 500,000 Common stock, $5 par 500,000 500,000 Retained earnings 6,180,000 5,375,500 Total stockholders’ equity $7,180,000 $6,375,000 Total liabilities and stockholders’ equity $9,780,000 $8,755,000

Instructions:

Determine the following measures for 20Y8.

Round ratio values to one decimal place and dollar amounts to the nearest cent. For number of days’ sales in receivables and number of days’ sales in inventory, round intermediate calculations to the nearest whole dollar and final amounts to one decimal place. Assume there are 365 days in the year.

1. Working capital $fill in the blank 1 2. Current ratio fill in the blank 2 3. Quick ratio fill in the blank 3 4. Accounts receivable turnover fill in the blank 4 5. Days’ sales in receivables fill in the blank 5 days 6. Inventory turnover fill in the blank 6 7. Days’ sales in inventory fill in the blank 7 days 8. Debt ratio fill in the blank 8 % 9. Ratio of liabilities to stockholders’ equity fill in the blank 9 10. Ratio of fixed assets to long-term liabilities fill in the blank 10 11. Times interest earned fill in the blank 11 times 12. Times preferred dividends earned fill in the blank 12 times 13. Asset turnover fill in the blank 13 14. Return on total assets fill in the blank 14 % 15. Return on stockholders’ equity fill in the blank 15 % 16. Return on common stockholders’ equity fill in the blank 16 % 17. Earnings per share on common stock $fill in the blank 17 18. Price-earnings ratio fill in the blank 18 19. Dividends per share of common stock $fill in the blank 19 20. Dividend yield