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Chapter 24: Question 27Q (page 1446)

Explain the meaning of the following terms: (a) common size analysis, (b) vertical analysis, (c) horizontal analysis, and (d) percentage analysis.

Short Answer

Expert verified

At all times, horizontal analysis is performed horizontally, while vertical analysis is performed vertically inside the column. Percentages are used to compare data between two or more systems, while directors of finance use common-size analysis.

Step by step solution

01

Meaning of Common Size Analysis

The common size analysis is to divide all dollar amounts in financial statements by a percentage of the base amount.

02

Meaning of Vertical Analysis

Vertical analysis is the percentage-wise expression of the base number of each item on the financial statement over a specific time period.

03

Meaning of Horizontal Analysis

Horizontal analysis is a calculation of the rate change over time. This is usually shown as a percentage increase compared to the same line item in the previous year. Users of financial statements can quickly view trends and development designs using horizontal analysis.

04

Meaning of Percentage Analysis

Percentage analysis is condensing a set of linked quantities into a range of rates on a specific basis. This form of check encourages comparison and is useful for valuing items such as cost, current assets, or net income.

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Most popular questions from this chapter

What type of disclosure or accounting do you believe is necessary for the following items?

a) Because of a general increase in the number of labor disputes and strikes, both within and outside the industry, there is an increased likelihood that a company will suffer a costly strike in the near future.

b) A company reports a material unusual and infrequent loss on the income statement. No other mention is made of this item in the annual report.

c) A company expects to recover a substantial amount in connection with a pending refund claim for a prior year’s taxes. Although the claim is being contested, counsel for the company has confirmed the client’s expectation of recovery.

Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were authorized for issue, are described below.

  1. A liability, estimated at \(160,000 at December 31, 2017, was settled on February 26, 2018, at \)170,000.
  2. A flood loss of $80,000 occurred on March 1, 2018.

Instructions

What effect do these subsequent events have on 2017 net income?

Answer each of the questions in the following unrelated situations.

b) A company had an average inventory last year of $200,000 and its inventory turnover was 5. If sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year, what will average inventory have to be during the current year?

“The financial statements of a company are management’s, not the accountant’s.” Discuss the implications of this statement.

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Compute the return on assets, profit margin on sales, earnings per share, price-earnings ratio, and current ratio for each of the 5 years for Matheny Inc.
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