Question

Need assistance with horizontal and vertical analysis:

Accounting 1B

Online Conference Materials

Chapter 15 – Horizontal and Vertical Analysis

Page 1

Revenue and expense data for Tudor Technologies is as follows:

                                   2017    2016

Sales                    $650,000    $700,000

Cost of Goods Sold 425,000    342,000

Selling Expense      100,000     84,200

Administration Expense 50,000 48,400

Income Tax Expense       4,000 4,000

Prepare a properly formatted multi-step income statement in comparative form showing dollar

amounts and the vertical analysis (must be shown as a percent)

Tudor Technologies Inc.

Income Statement

For the Years Ended December 31, 2017 and 2016

                     

                                 2017                                                     2016                                         2017 Percent                                         2016 Percent

Sales $                                                 $

-                    ______________ ______________

=

-

- ______________ ______________

=Total Expenses ______________ ______________

- ______________ ______________

= Net Income $ $

Analysis:

The analysis indicates that the cost of goods sold as a percent of sales increase by __________%

between the two years. Selling and Administrative expenses (increased/decreased) by

_______%. Net income as a percent of sales (increased/decreased) by _______%.

Accounting 1B

Online Conference Materials

Chapter 15 – Horizontal and Vertical Analysis

Page 2

Below are the solvency and profitability ratios Elizabethan Enterprises Inc. for 2017 and 2016.

Indicate if 2017 was Better or Worse than 2016. Further indicate how Elizabethan Enterprises

did in comparison to their Industry.

A = Better

B = Worse

                       2017 2016 Better/Worse Industry Better/Worse

Current Ratio 10.0 9.8 11.0

Quick Ratio 8.0 8.2 7.5

Accounts Receivable Turnover 9.1 10.0 8.1

Number of Days’ Sales in Receivables 40.1 36.5 47.5

Inventory Turnover 12.0 11.8 15.0

Number of Days’ Sales in Inventory 30.4 30.9 24.3

Ratio of Liabilities to SE 15.4 13.2 16.0

Number of Times Interest Earned 4.0 3.8 4.5

Ratio of Sales to Assets 5.3 5.6 4.8

Rate Earned on Total Assets 6.5 6.8 5.3

Rate Earned on SE 6.2 4.5 7.5

Earnings per Share 2.5 2.3 3

Price-Earnings Ratio 10.2 10.5 10.6

Dividends per Share 0.4 0.6 0.3

1. Which of the following income statement figures would probably be the best indicator of a

company’s future performance?

a. Total revenues

b. Income from operations

c. Net income

d. Gross profit

2. Vertical analysis is also known as

a. perpendicular analysis.

b. common size analysis.

c. trend analysis.

d. straight-line analysis.

3. In a common size balance sheet, the 100 percent figure is

a. total current assets.

b. total property, plant and equipment.

c. total liabilities.

d. total assets.

Accounting 1B

Online Conference Materials

Chapter 15 – Horizontal and Vertical Analysis

Page 3

4. In a common size income statement, the 100% figure is

a. net income.

b. cost of goods sold.

c. gross profit.

d. net sales.

5. Cochran Corporation, Inc. has the following income statement (in millions):

COCHRAN CORPORATION, INC.

Income Statement

For the Year Ended December 31, 2017

Net Sales $240

Cost of Goods Sold 150

Gross Profit 90

Operating Expenses 65

Net Income $ 25

Using vertical analysis, what percentage is assigned to cost of goods sold?

a. 37%

b. 63%

c. 100%

d. 50%

6. Long-term creditors are usually most interested in evaluating

a. liquidity.

b. marketability.

c. profitability.

d. solvency.

7. A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000

current liability. As a result of this transaction, the current ratio and working capital will

a. both decrease.

b. both increase.

c. increase and remain the same, respectively.

d. remain the same and decrease, respectively.

8. A high accounts receivable turnover indicates

a. customers are making payments quickly.

b. a large portion of the company’s sales are on credit.

c. many customers are not paying their receivables.

d. the company’s sales have increased.

Accounting 1B

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Chapter 15 – Horizontal and Vertical Analysis

Page 4

9. Which one of the following would not be considered a liquidity ratio?

a. Current ratio

b. Inventory turnover

c. Average collection period

d. Return on assets

10. A company that is leveraged is one that

a. has a high earnings per share.

b. contains debt financing.

c. contains equity financing.

d. has a high current ratio.

11. The inventory turnover is calculated by dividing

a. cost of goods sold by the ending inventory.

b. cost of goods sold by the beginning inventory.

c. cost of goods sold by the average inventory.

d. average inventory by cost of goods sold.

12. A successful grocery store would probably have

a. a low inventory turnover.

b. a high inventory turnover.

c. zero profit margin.

d. low volume.

13. The following information is available for Patterson Company:

2017 2016

Accounts receivable $ 360,000 $ 340,000

Inventory 280,000 320,000

Net credit sales 3,150,000 2,600,000

Cost of goods sold 1,800,000 840,000

Net income 300,000 170,000

The accounts receivable turnover for 2017 is

a. 8.8 times.

b. 4.5 times.

c. 9.0 times.

d. 9.3 times.

14. The current ratio would be of most interest to

a. short-term creditors.

b. long-term creditors.

c. stockholders.

d. customers.

Accounting 1B

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Chapter 15 – Horizontal and Vertical Analysis

Page 5

15. The following information is available for Patterson Company:

2017 2016

Accounts receivable $ 360,000 $ 340,000

Inventory 280,000 320,000

Net credit sales 3,000,000 1,400,000

Cost of goods sold 1,800,000 840,000

Net income 300,000 170,000

The inventory turnover for 2017 is

a. 6.4 times.

b. 6.0 times.

c. 5.6 times.

d. 3.0 times.

16. All of the following are ways that a company's current ratio would decrease except

a. purchasing inventory on account.

b. adding equal amounts to the numerator and denominator.

c. paying off one-third of its accounts payable.

d. paying cash for new equipment.

Thank you!!

Answer 1

Tudor Technologies Inc.
Income Statement
For the Years Ended December 31, 2017 and 2016
Descriptions	2017	Percent	2016	Percent
Sales	$ 6,50,000	100%	$      7,00,000	100%
Cost of Goods Sold	$ 4,25,000	65.38%	$      3,42,000	48.86%
Gross Profit	$ 2,25,000	34.62%	$      3,58,000	51.14%
Selling Expenses	$ 1,00,000	15.38%	$         84,200	12.03%
Adminstrative expenses	$     50,000	7.69%	$         48,400	6.91%
Total Operating Expenses	$ 1,50,000	23.08%	$      1,32,600	18.94%
Income before income tax	$     75,000	11.54%	$      2,25,400	32.20%
Income tax expenses	$       4,000	0.62%	$            4,000	0.57%
Net Income	$     71,000	10.92%	$      2,21,400	31.63%
Vertical Analysis
The analysis indicates that the cost of goods sold as a percent of sales increase by 16.53% (65.38%-48.86%) between the two years. Selling and Administrative expenses increased by 3.36%(15.38%-12.03%). Net income as a percent of sales decreased by 20.71% (31.63%-10.92%)
Note :-
In above income percentage of each head have been calculated by below formula
Income or expenses head/Sales
For example
Percentage of cost of goods sold has been calculated as
Cost of Goods sold/sales	=$425000/$650000		=65.38%

Q2 -Below are the solvency and profitability ratios Elizabethan Enterprises Inc. for 2017 and 2016.

Indicate if 2017 was Better or Worse than 2016. Further indicate how Elizabethan Enterprises

did in comparison to their Industry.

Answer : 2017 was worse than 2016,

From the following point we come to know

1. From below ratio we came to know

Ratio of Sales to Assets 5.3 5.6 4.8 it was decrease compare to 2016 that means Decrease of Sales

Rate Earned on Total Assets 6.5 6.8 5.3 it was decrease compare to 2016 that means Decrease of Profit

Rate Earned on SE 6.2 4.5 7.5 it was decrease compare to 2016 that means Decrease of Profit

Earnings per Share 2.5 2.3 3 it was decrease compare to 2016 that means Decrease of Profit

Price-Earnings Ratio 10.2 10.5 10.6 it was decrease compare to 2016 that means Decrease of Profit

Dividends per Share 0.4 0.6 0.3 it was decrease compare to 2016 that means Decrease of Profit

Hence we can say performance of 2017 is worse than 2016.

3.

Which of the following income statement figures would probably be the best indicator of a

company’s future performance?

Answer Net Income  

Net Income is indicate the correct picture of an organisation .Sale or gross profit is not a final earning. Net income is the financial earning after deducting the all expenses.

2. Vertical analysis is also known as

Answer  common size analysis.

3. In a common size balance sheet, the 100 percent figure is

Answer :Total assets.

As all percentage of all heads in balance sheet is calculated compare with total assets.

4. In a common size income statement, the 100% figure is

Answer : Net Sales

5. Cochran Corporation, Inc. has the following income statement (in millions):

Using vertical analysis, what percentage is assigned to cost of goods sold?

Answer : 63%

Cost of Goods sold/Net Sales

6. Long-term creditors are usually most interested in evaluating

d. solvency.

In accounting, long-term is considered any period of time greater than one year or 365 days. So a long-term creditor would be most interested in solvency ratios. Solvency is defined as a company's ability to satisfy its long-term obligations

7. A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000

current liability. As a result of this transaction, the current ratio and working capital will

Both Increase

If liability is reduce then current become higher compare liability as formula of current ratio is Current Assets/Current Liability so if liability decrease current ratio will increase and formula for working capital is Current Asset -Current Liability i.e. if liability decrease working capital will increase

for Example Current $60000 and Current Liability $35000. So Current ratio will be $60000/$35000 =1.71 and working capital will be $60000-$35000=$25000 if Current liability decrease $1000 then current ratio will be $60000/$34000 =1.76

and working =$60000-$34000=$26000.