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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Monroe Corp. reported the following amounts on its balance sheet at December 31, 2018 and 2017:
2018, 2017
Cash and Receivables \( 35,000 \) 40,000
Merchandise Inventory 20,000 15,000
Property, Plant, and Equipment, Net 80,000 60,000
Total Assets \( 135,000 \) 115,000
Prepare a vertical analysis of Monroe Corp. for 2018 and 2017.
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.
Grand Oaks Realty’s net revenue & net income for the following five-year period using 2015 as the base year, follow:
Requirement:
Compute a trend analysis for the net revenue & net income. Round to the nearest full percent.
Which grew faster during the period, net revenue or the net income?
Completing a comprehensive financial statement analysis
In its annual report, ABC Athletic Supply, Inc. includes the following five-year financial summary:
| ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted) | ||||||
(Dollar amounts in thousands except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 |
Net Sales Revenue | \(250,000 | \)216,000 | \(191,000 | \)161,000 | \(134,000 | |
Net Sales Revenue Increase | 16% | 13% | 19% | 20% | 17% | |
Domestic Comparative Store Sales Increase | 5% | 6% | 4% | 7% | 9% | |
Other Income—Net | 2,110 | 1,840 | 1,760 | 1,690 | 1,330 | |
Cost of Goods Sold | 189,250 | 164,592 | 148,216 | 126,385 | 106,396 | |
Selling and Administrative Expenses | 41,210 | 36,330 | 31,620 | 27,440 | 22,540 | |
Interest: | ||||||
Interest Expense | (1,080) | (1,380) | (1,400) | (1,020) | (830) | |
Interest Income | 125 | 165 | 155 | 235 | 190 | |
Income Tax Expense | 4,470 | 3,900 | 3,700 | 3,320 | 2,700 | |
Net Income | 16,225 | 11,803 | 7,979 | 4,760 | 3,054 | |
Per Share of Common Stock: | ||||||
Net Income | 1.60 | 1.30 | 1.20 | 1.00 | 0.78 | |
Dividends | 0.40 | 0.38 | 0.34 | 0.30 | 0.26 | |
Financial Position | ||||||
Current Assets, Excluding Merchandise Inventory | \)30,700 | \(27,200 | \)26,700 | \(24,400 | \)21,500 | |
Merchandise Inventory | 24,500 | 22,600 | 21,700 | 19,000 | 17,500 | $16,700 |
Property, Plant, and Equipment, Net | 51,400 | 45,200 | 40,000 | 35,100 | 25,600 | |
Total Assets | 106,600 | 95,000 | 88,400 | 78,500 | 64,600 | |
Current Liabilities | 32,300 | 28,000 | 28,300 | 25,000 | 16,500 | |
Long-term Debt | 23,000 | 21,500 | 17,600 | 19,100 | 12,000 | |
Stockholders’ Equity | 51,300 | 45,500 | 42,500 | 34,400 | 36,100 | |
Financial Ratios | ||||||
Acid-Test Ratio | 1.0 | 1.0 | 0.9 | 1.0 | 1.3 | |
Rate of Return on Total Assets | 17.2% | 14.4% | 11.2% | 8.1% | 7.1% | |
Rate of Return on Common Stockholders’ Equity | 35.5% | 26.% | 20.8% | 13.5% | 13.0% | |
Requirements
Analyze the company’s financial summary for the fiscal years 2014–2018 to decide whether to invest in the common stock of ABC. Include the following sections in your analysis.
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.
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