Question

Short Answer Questions

1. Use the information below to analyze XYZ Corp. Conduct a horizontal (trend) analysis and comment on the performance of the company. (12pts)

XYZ Corp.

Income Statement

For the Year End Dec 31, 2009

	2009	%	2008	%	2007
Net Sales	$2,500,000		$2,300,000		$2,100,000
COGS	1,400,000		1,334,000		1,154,000
Gross Profit	$1,100,000		$966,000		$946,000
Operating Expenses
Administrative	820,000		763,000		706,000
Marketing & Advertising	70,000		66,000		60,000
Depreciation	50,000		30,000		30,000
Total Operating Expenses	940,000		859,000		796,000
Operating Profit	160,000		107,000		150,000
Income Taxes @50%	80,000		53,500		75,000
NET INCOME	80,000		53,500		75,000

Answer 1

For a horizontal (trend) analysis, we construct a common-size income statement for each year.

In a common-size income statement, each line item is express as a % of total sales for the year. This enables us to evaluate the trend over the time period.

From the common-size income statement, it can be seen that :

• COGS as a % of sales has increased over time
• Administrative expenses as a % of sales have decreases
• marketing and advertising expenses as a % of sales have remained constant
• Depreciation as a % of sales has increased
• Total operating expenses have remained flat
• Operating profit and net income decreased from 2007 to 2008, and increased from 2008 to 2009