Question

What can we find out by conducting the Vertical Analysis of the Income Statement?

1. We can find out whether individual expenses are growing per unit sales over time.

2. We can find out whether the amounts of individual expenses are growing over time.

3. We can find out how fast revenues are growing over time.

4. We can find out growth rate of net profit of each year against the previous year.

Which of the following describes the Retained Earnings most appropriately?

1. It is the amount of the currently year's Net Profit before taking out dividends.

2. It is the net of the current year's Net Profit after taking out dividends.

3. It is the accumulated amount of Net Profits of the company. Net Losses are not included in this amount. For this reason, it cannot become negative.

4. It is the accumulated amount of Net Profits or Net Losses of the business. Because Net Losses are also included, the amount of Retained Earnings may become negative.

Answer 1

1. Vertical Analysis of Income Statement:

Vertical analysis of income statement is a tool of financial statement analysis in which each line item is listed as a percentage of a base figure (gross sales) within the statement. Thus line items on an income statement can be stated as a percentage of gross sales.

Therefore, from the above discussion we can come to a conclusion that Vertical analysis shows all line items in the income statement as a percentage of gross sales.

Now, it is clear that by conducting vertical analysis of income statement we can find out whether individual expenses are growing per unit sales over time.

(Answer:1)

2. Retained Earnings:

Retained earnings are the accumulated net earnings of an entity after accounting for dividends. Retained Earnings can never be negative.

Retained Earnings= Accumulated Profits( Opening Retained Earnings+ current year net profit) - Dividends

Thus, fron the above discussion it is very clear that Option 3 describes the retained earnings most appropriately,[ i.e, it is the accumulated amount of net profits of the company.Net losses are not included in this amount. For this reason it cannot be negative.]