Question

Problem B Deere & Company manufactures, distributes, and finances a full range of agricultural equipment; a broad range of industrial equipment for construction, forestry, and public works; and a variety of lawn and grounds care equipment. The company also provides credit, health care, and insurance products for businesses and the general public. Consider the following information from the Deere & Company Annual Report:

(in millions)	Year 1	Year 2	Year 3	Year 4
Sales	$12,791	$13,822	$11,751	$13,137
Cost of goods sold	8,481	9,234	8,178	8,936
Gross margin	4,310	4,588	3,573	4,201
Operating expenses	2,694	2,841	3,021	3,236
Net operating income	$ 1,616	$ 1,747	$ 552	$ 965

1. Prepare a statement showing the trend percentages for each item using Year 1 as the base year.
2. Use Years 3 (Base Year) and 4 and prepare horizontal analysis showing both dollar change and percentage change.
3. Use Years 3 and 4 and prepare common size income statements (also known as vertical analysis) for both years.

Answer 1

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Part a Trend	a	b	c	d	(b-a)/a	(c-a)/a	(d-a)/a
					Trend
(in millions)	Year 1	Year 2	Year 3	Year 4	Year 2	Year 3	Year 4
Sales	$       12,791	$     13,822	$                   11,751	$                            13,137	8.1%	-8.1%	2.7%
Cost of goods sold	$         8,481	$        9,234	$                     8,178	$                              8,936	8.9%	-3.6%	5.4%
Gross margin	$         4,310	$        4,588	$                     3,573	$                              4,201	6.5%	-17.1%	-2.5%
Operating expenses	$         2,694	$        2,841	$                     3,021	$                              3,236	5.5%	12.1%	20.1%
Net operating income	$         1,616	$        1,747	$                         552	$                                  965	8.1%	-65.8%	-40.3%
Part b Horizontal
	a	b	b-a	(b-a)/a
(in millions)	Year 3	Year 4	Dollar Change	percntage Change
Sales	$       11,751	$     13,137	$                     1,386	11.79%
Cost of goods sold	$         8,178	$        8,936	$                         758	9.27%
Gross margin	$         3,573	$        4,201	$                         628	17.58%
Operating expenses	$         3,021	$        3,236	$                         215	7.12%
Net operating income	$             552	$           965	$                         413	74.82%
Part c common size
	a	b	Amount/Sales
(in millions)	Year 3	Year 4	Year 3	Year 4
Sales	$       11,751	$     13,137	100.00%	100.00%
Cost of goods sold	$         8,178	$        8,936	69.59%	68.02%
Gross margin	$         3,573	$        4,201	30.41%	31.98%
Operating expenses	$         3,021	$        3,236	25.71%	24.63%
Net operating income	$             552	$           965	4.70%	7.35%