Question

(Horizontal and Vertical Analysis) Presented below is the comparative balance sheet for Gilmour Company.

GILMOUR COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2018 AND 2017
December 31
	2018	2017
Assets
Cash	\( 180,000	\) 275,000
Accounts receivable (net)	220,000	155,000
Short-term investments	270,000	150,000
Inventories	1,060,000	980,000
Prepaid expenses	25,000	25,000
Plant & equipment	2,585,000	1,950,000
Accumulated depreciation	(1,000,000)	(750,000)
	\(3,340,000	(2,785,000)
Liabilities and Stockholders’ Equity
Accounts payable	\) 50,000	\( 75,000
Accrued expenses	170,000	200,000
Bonds payable	450,000	190,000
Common stock	2,100,000	1,770,000
Retained earnings	570,000	550,000
	\)3,340,000	(2,785,000)

Instructions

(Round to two decimal places.)

1. Of what value is the additional information provided in part (a)?

Short answer

Assets, liabilities, and stockholders, equity decreases on a common basis, resulting in breaking the statement down into figures that are easier to understand.

Step-by-step solution

Meaning of Horizontal Analysis

Horizontal analysis is the comparison of income, assets, and other financial data of an individual or company for two or more time periods. This analysis is a technique for examining a company's financial records.

Determining the value, which is the additional information provided in part (a)

Part (a) provided that the component percentage (common size) balance sheet allows for a more straightforward examination. Total assets, total liabilities, and shareholders' equity are all reduced on a common basis. As a result, the statement is broken down into statistics that are easier to understand.

For example, management may assume that 6.59 percent of accounts receivable is a low figure. Perhaps the corporation is not giving enough credit. The increase in the ratio of bonds payable to 13.47 percent from 6.82 percent reflects increasing leverage, which could have a detrimental effect on a company's ability to pay its debts and its long-term stability.