Question

In: Accounting

Below is the partial balance sheet for Gabi Gold Limited: December 31, 2021 December 31, 2020...

Below is the partial balance sheet for Gabi Gold Limited:

December 31, 2021 December 31, 2020
Accounts Receivable $ 110,000 $ 140,000
Inventory 80,000 95,000
Total Assets 335,000 376,000


Instructions
Using the items from the comparative balance sheet of Gabi Gold Limited, illustrate horizontal and vertical analysis. Discuss the results of each type of analysis.

Solutions

Expert Solution

Horizontal Analysis :

Horizontal Analysis is used in the review of a comapny's financial statements over multiple periods.It is usually depicted as a percentage growth over the same line item in the base year.It allows financial statements users to easily spot trends and growth patterns.

Change since base period = (Current year amount-Base year amount)/Base year amount

Accounts Receivables: =($110000-$140000)/$140000

                                  = -21.43%

Inventory                   : =($80000-$95000)/$95000

                                  = -15.79%

Total Assets              : =($335000-$376000)/$376000

                                  = -10.90%

This indicates that during 2021 there has been decline in growth.

Vertical Analysis :

Vertical Analysis is analysis of relationship of different items of a financial statement with a common item by expressing each item as a percentage of that common item.The percentage calculated can be easily compared with the results of corresponding percentages of the previous year or of some other firms as the numbers are brought to common base.

In Balance Sheet, Vertical analysis is done by computing elements as a percentage of total assets and in case of income statement, it is done by computing elements as a percentage of total sales.

For 2021

Accounts Receivables as percentage of total assets = $110000/$335000*100

                                                                            = 32.84%

Inventory as percentage of total assets                    = $80000/$335000*100

                                                                            = 23.88%

Accounts receivables form 32.84% of the total assets and Inventory form 23.88% of total assets.

ekkarill92 answered 2 years ago
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