Question

Comparative statement data for ABC Company and XYZ Company is presented below.

    ABC Company                                       XYZ Company

                                    2018                2017                            2018                2017

Net Sales                     $1,570,000                                          $340,000

COGS                           1,080,490                                          238,000

Operating Expenses         302,275                                              79,000

Interest Expense                   6,800                                                1,252

Income tax expense            62,500                                                7,650

Current assets                  325,975      312,410                           83,336         79,467

Plant assets (net)              521,310      500,000                       139,728         125,812

Current liabilities                66,325      75,815                            35,348        30,281

Long-term liabilities         108,500      90,000                              29,620        25,000

Common stock                  500,000      500,000                           120,000       120,000

Retained earnings             172,460      146,595                            38,096        29,998

Prepare a vertical analysis of the 2017 income statement data for the two companies in columnar form.

Comment on the relative profitability of both companies by computing return on assets and return on equity.

Answer 1

				Comparative income statement
				ABC Company		XYZ Company
				Dollar	%	Dollar	%
			Net sales	1,570,000	100%	340,000	100%
			Cost of goods sold	1,080,490	69%	238,000	70%
			Gross profit	489,510	31%	102,000	30%
			Operating expenses	302,275	19%	79,000	23%
			Income from operations	187,235	12%	23,000	7%
			Other expenses and losses
			Interest expenses	6,800	0%	1,252	0%
			Income before income taxes	180,435	11%	21,748	6%
			Income tax expenses	62,500	4%	7,650	2%
			Net income	117,935	8%	14,098	4%
			Relative profitability of both companies
			Return on assets =(Net income/Average assets)
			Calculation of average assets:-
				ABC Company		XYZ Company
				2,018	2,017	2,018	2,017
			Current assets	325,975	312,410	83,336	79,467
			Plant assets (net)	521,310	500,000	139,728	125,812
			Total assets	847,285	812,410	223,064	205,279
			Average assets	829,848		214,172
			Net income	117,935		14,098
			Return on assets	14.2%		6.6%
			Return on common stock holder's equity =(Net income/Average common stock holder's equity
			Calculation of Average common stock holder's equity
				ABC Company		XYZ Company
				2,018	2,017	2,018	2,017
			Common stock	500,000	500,000	120,000	120,000
			Retained earnings	172,460	146,595	38,096	29,998
			Total equity	672,460	646,595	158,096	149,998
			Average common stock holder's equity	659,528		154,047
			Net income	117,935		14,098
			Return on common stock holder's equity	17.9%		9.2%
			Hence, ABC Company appears to be more profitable, since return on assets and return on common stock holder's equity both are higher.