Chapter 15: Q5RQ (page 835)
Question: What is vertical analysis? What item is used as the base for the income statement? What item is used as the base for the balance sheet?
Answer
Vertical analysis is used to show the relative size of each item line of the income statement and the balance sheet.
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Data for Oxford State Bank follow:
2018 | 2017 | |
Net Income | \(71,900 | \)64,300 |
Dividends—Common | 22,000 | 22,000 |
Dividends—Preferred | 16,800 | 16,800 |
Total Stockholders’ Equity at Year-End (includes 95,000 shares of common stock) | 770,000 | 610,000 |
Net Income | \( 71,900 | \) 64,300 |
Market Price per Share of Common Stock | \( 16.50 | \) 10.00 |
Evaluate the common stock of Oxford State Bank as an investment. Specifically,
use the three stock ratios to determine whether the common stock has increased or decreased in attractiveness during the past year. Round to two decimal places.
Preparing common-size income statements
Refer to the data presented for Mulberry Designs, Inc. in Exercise E15-13.
Requirements
1. Prepare a comparative common-size income statement for Mulberry Designs,
Inc. using the 2018 and 2017 data. Round percentages to one-tenth percent (three
decimal places).
2. To an investor, how does 2018 compare with 2017? Explain your reasoning.
Using ratios to evaluate a stock investment
Comparative financial statement data of Sanfield, Inc. follow:
| SANFIELD, INC. Comparative Income Statement Years Ended December 31, 2018, and 2017 | ||
2018 | 2017 | |
Net Sales Revenue | \( 462,000 | \) 430,000 |
Cost of Goods Sold | 236,000 | 213,000 |
Gross Profit | 226,000 | 217,000 |
Operating Expense | 135,000 | 133,000 |
Income from Operations | 91,000 | 84,000 |
Interest Expense | 8,000 | 12,000 |
Income Before Income Tax | 83,000 | 72,000 |
Income Tax Expense | 18,000 | 22,000 |
Net Income | \( 65,000 | \) 50,000 |
| SANFIELD, INC. Comparative Balance Sheet December 31, 2018, and 2017 | |||
2018 | 2017 | 2016 | |
Asset | |||
Current Assets: | |||
Cash | \( 99,000 | \) 97,000 | |
Accounts Receivable, Net | 109,000 | 117,000 | \( 100,000 |
Merchandise Inventory | 142,000 | 164,000 | 207,000 |
Prepaid Expenses | 15,000 | 5,000 | |
Total Current Assets | 365,000 | 383,000 | |
Property, Plant, and Equipment, Net | 215,000 | 177,000 | |
Total Assets | \) 580,000 | \( 560,000 | \) 599,000 |
Liabilities | |||
Total Current Liabilities | \( 222,000 | \) 244,000 | |
Long-term Liabilities | 113,000 | 92,000 | |
Total Liabilities | 335,000 | 336,000 | |
Stockholders’ Equity | |||
Preferred Stock, 4% | 92,000 | 92,000 | |
Common Stockholders’ Equity, no par | 153,000 | 132,000 | 85,000 |
Total Liabilities and Stockholders’ Equity | \( 580,000 | \) 560,000 | |
1. Market price of Sanfield’s common stock: \(51.48 at December 31, 2018, and \)37.08 at December 31, 2017.
2. Common shares outstanding: 16,000 on December 31, 2018 and 15,000 on December 31, 2017 and 2016.
3. All sales are on credit.
Requirements
1. Compute the following ratios for 2018 and 2017:
2. Decide (a) whether Sanfield’s ability to pay debts and sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.
Briefly describe the ratios that can be used to evaluate a company’s ability to sell merchandise inventory and collect receivables.
Great Value Optical Company reported the following amounts on its balance sheet at
December 31, 2018 and 2017:
2018 2017
Cash and Receivables \( 80,640 \) 80,575
Merchandise Inventory 56,840 54,450
Property, Plant, and Equipment, Net 142,520 139,975
Total Assets \( 280,000 \) 275,000
Prepare a vertical analysis of Great Value’s assets for 2018 and 2017.
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