Question

You are asked to conduct an audit by your client, namely PT A, which is engaged in book retail. According to the manager of PT A, the gross margin for the last 4 years has always decreased. The manager said that the drop was due to a drop in sales, as many people switched from buying books at bookstores to buying online. The following is PT A's data for the last four years:

	2017	2016	2015	2014
Sale (thousands)s	47,175	44,039	37,073	35,035
CoGS (thousand)s	30,314	27,998	23,431	22,072
Gross Margin $	16,861	16,041	13,642	12,963
Percent	35,7%	36,4%	36,8%	37%

as a financial auditor, you cannot just trust a statement from a manager. Perform vertical and horizontal analysis on the data above, to answer whether you agree or not with the manager's statement! Explain your answer!

Answer 1

Horizontal Analysis
In the Horizontal Analysis, we have to find the change on year on year basis considering previous year as base year
					Change	%ageChange
Particulars	2014	2015	2016	2017	2015	2016	2017	2015	2016	2017
Sales	35,035	37,073	44,039	47,175	2,038	6,966	3,136	6%	19%	7%
COGS	22,072	23,431	27,998	30,314	1,359	4,567	2,316	6%	19%	8%
Gross Margin	12,963	13,642	16,041	16,861	679	2,399	820	5%	18%	5%
While doing the horizontal analysis, it is find that the sales is improving month on month basis.
Vertical Analysis
In the Vertical Analysis, we have to find the change of every line item of financial statement as a percentage of another item
					%age of sales
Particulars	2014	2015	2016	2017	2014	2015	2016	2017
Sales	35,035	37,073	44,039	47,175
COGS	22,072	23,431	27,998	30,314	63%	63%	64%	64%
Gross Margin	12,963	13,642	16,041	16,861	37%	37%	36%	36%
Sales are improving year on year, the reason for decrease in margin in 2016 & 2017 is due to increase in cost by 1%