ILLUSTRATION 15-1

HORIZONTAL ANALYSIS

HORIZONTAL ANALYSIS

2006 2005 2004

Sales $150,000 $125,000 $100,000

Base
year

150% 125% 100%

25% increase

50% increase

Percentage increase or decrease from base year formula:

Current year amount – Base year amount

Base year amount

Example: Percent increase in sales in 2006 from 2004

$150,000 – $100,000
= 50%
$100,000

Copyright © 2006 John Wiley & Sons, Inc. Weygandt/Financial Accounting 5e 110
ILLUSTRATION 15-2
VERTICAL ANALYSIS
SAME COMPANY V
2006 2005 E
Amount Percent Amount Percent R
T
Sales $120,000 105.73% $80,000 106.67% I
Sales returns 6,500 5.73% 5,000 6.67% C
Net sales 113,500 100.00% 75,000 100.00% A
L
Cost of goods sold 65,000 57.27% 40,000 53.33%
Gross profit 48,500 42.73% 35,000 46.67% A
N
Selling expenses 18,000 15.86% 15,000 20.00% A
Administrative expenses 10,000 8.81% 8,000 10.67% L
Total operating expenses 28,000 24.67% 23,000 30.67% Y
S
Net income $20,500 18.06% $12,000 16.00% I
S

Reflects the size of each item relative

to a base amount (net sales)

COMMON SIZE ANALYSIS

Restating each item on a financial statement in terms of a percentage of
a base amount, enables the comparison of companies of different sizes

BIG COMPANY SMALL COMPANY V

2006 2006 E
Amount Percent Amount Percent R
T
Sales $1,200,000 105.73% $80,000 106.67% I
Sales returns 65,000 5.73% 5,000 6.67% C
Net sales 1,135,000 100.00% 75,000 100.00% A
L
Cost of goods sold 650,000 57.27% 40,000 53.33%
Gross profit 485,000 42.73% 35,000 46.67% A
N
Selling expenses 180,000 15.86% 15,000 20.00% A
Administrative expenses 100,000 8.81% 8,000 10.67% L
Total operating expenses 280,000 24.67% 23,000 30.67% Y
S
Net income $205,000 18.06% $12,000 16.00% I
S

Copyright © 2006 John Wiley & Sons, Inc. Weygandt/Financial Accounting 5e 111
ILLUSTRATION 15-3
LIQUIDITY RATIOS

Ratio Formula Purpose or Use

Liquidity Ratios
1. Current ratio Current assets Measures short-term
Current liabilities debt-paying ability.

2. Acid-test or Cash + Measures immediate

quick ratio short-term investments short-term liquidity.
+ receivables (net)
Current liabilities

3. Receivables Net credit sales Measures liquidity of

turnover Average net receivables receivables.

4. Inventory turnover Cost of goods sold Measures liquidity of

Average inventory inventory.

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ILLUSTRATION 15-4
PROFITABILITY RATIOS

Ratio Formula Purpose or Use

Profitability Ratios
1. Profit margin Net income Measures net income
Net sales generated by each
dollar of sales.

2. Asset turnover Net sales Measures how

Average assets efficiently assets are
used to generate sales.

3. Return on assets Net income Measures overall

Average assets profitability of assets.

4. Return on common Net income Measures profitability

stockholders’ equity Average common of owners’
stockholders’ equity investment.

5. Earnings per share Net income Measures net income

Weighted average earned on each share
common shares of common stock.
outstanding

6. Price-earnings ratio Market price Measures the ratio of

per share of stock the market price per
Earnings per share share to earnings per
share.

7. Payout ratio Cash dividends Measures percentage

Net income of earnings distributed
in the form of cash
dividends.

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ILLUSTRATION 15-5
SOLVENCY RATIOS

Ratio Formula Purpose or Use

Solvency Ratios
1. Debt to total assets Total debt Measures the
Total assets percentage of total
assets provided by
creditors.

2. Times interest Income before income Measures ability to

earned taxes and interest expense meet interest
Interest expense payments as they
come due.

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ILLUSTRATION 15-6
EXTRAORDINARY ITEMS

• Events and transactions that are (1) unusual in nature, and

(2) infrequent in occurrence.

• Reported net of taxes in a separate section of the income

statement immediately below discontinued operations, if any.

Extraordinary Ordinary
Examples of 1. Effects of major 1. Effects of major
appropriate casualties (acts of casualties (acts of
classification for God), if rare in God), frequent in
extraordinary the area. the area.
and ordinary
items. 2. Expropriation 2. Write-down of
(takeover) of inventories or
property by a write-off of
foreign goverment. receivables.

3. Effects of newly 3. Losses attributable

enacted law or to labor strikes.
regulation such as
a condemnation 4. Gains or losses from
action. sales of property,
plant, or equipment.
4. Destruction of
property by fire
or explosion.

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