Chapter 15: Q24PGB (page 843)

The Klein Department Stores, Inc. chief executive officer (CEO) has asked you tocompare the company’s profit performance and financial position with the averages for the industry. The CEO has given you the company’s income statement and balance sheet as well as the industry average data for retailers.
Requirements
1.Prepare a vertical analysis for Klein for both its income statement and balance sheet.
2.Compare the company’s profit performance and financial position with the averagefor the industry.

Short Answer

Expert verified

(1) Vertical analysis is shown in Step 1 and 2.

(2) Company is less profitable than industry average. Also, liabilities are higher than the industry average

Step by step solution

Step1:Vertical analysis of income statement

In vertical analysis of income statement, sales revenue (100%) taken as base.

K D S INC.
Income Statement
Year Ended December 31, 2018
	K D S Inc.	Percentage	Industry Average
Net Sales Revenue	$778000	100%	100.00%
Less: Cost of Goods Sold	524372	67.4%	65.80%
Gross Profit	253628	32.6%	34.20%
Operating expenses	159490	20.5%	19.70%
Operating income	94138	12.1%	14.50%
Other expenses	6224	0.8%	0.40%
Net income	87914	11.3%	14.10%

Step2:Vertical analysis of Balance Sheet

K D S INC.
Balance Sheet
Year Ended December 31, 2018
	K D S Inc.	Percentage	Industry Average
Current Assets	$339000	67.8%	70.90%
Property plant & equipment net	130000	26%	23.6
Intangible Asset, net	7000	1.4%	0.8
Other assets	24000	4.8%	4.7
Total Assets	500000	100%	100.00%
Current Liabilities	232000	46.4%	48.10%
Long Term Liabilities	111000	22.2%	16.60%
Total Liabilities	343000	68.6%	64.70%
Stockholder’s equity	157000	31.4%	35.30%
Total liabilities &stockholder’s equity	500000	100.00%	100.00%

Step3:Performance and financial position analysis

The Industrial Average is a useful measure for evaluating a company. KDS Inc. Net income percentage 11.3 % is significantly lower than the industrial average. Hence, company should control its cost to increase the net income.

From the above analysis company’s fixed assets percentage is more than the industry average. It indicates that company invested more money on fixed assets Company’s long term liabilities percentage is also higher than the industry average rate. This indicates that company has borrowed money from long term liabilities more than the industries average

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Cash	\( 23,000
Accounts Receivable, Net	81,000
Merchandise Inventory	185,000
Total Assets	635,000
Accounts Payable	99,000
Accrued Liabilities	37,000
Short-term Notes Payable	51,000
Long-term Liabilities	224,000
Net Income	68,000
Common Shares Outstanding	20,000 shares

	Digitalized	Every Zone
Net sales revenue (all on credit)	\(423,035	\)493,845
Cost of goods sold	210,000	260,000
Interest expenses	0	19,000
Net income	51,000	72,000

	Digitalized	Every Zone
Current assets:
Cash	\(24,000	\)17,000
Short-term investment	40,000	14,000
Accounts receivables, Net	40,000	48,000
Merchandise inventory	66,000	97,000
Prepaid expenses	23,000	12,000
Total current assets	\(193,000	\)188,000

Total assets	266,000	323,000
Total current liabilities	105,000	96,000
Total liabilities	105,000	128,000
Common stock
\(1 par (12,000 shares)	12,000
\)1 par (17,000 shares)		17,000
Total stockholders equity	161,000	195,000
Market price per share of common stock	76.50	114.48
Dividend paid per common stock	1.10	1.00

	Digitalized	Every Zone
Balance sheet:
Accounts Receivable, net	\(41,000	\)54,000
Merchandise Inventory	81,000	87,000
Total Assets	261,000	272,000
Common Stock:
\(1 par (12,000 shares)	12,000
\)1 par (17,000 shares)		17,000

XYZ ATHLETIC SUPPLY, INC.
Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2016
Net sales revenue	\(275,000	\)222,000	\(199,000	\)171,000	131,000
Net Sales Revenue Increase	24%	12%	16%	31%	17%
Domestic Comparative Store Sales Increase	6%	6%	5%	8%	10%
Other Income—Net	2,090	1,780	1,770	1,700	1,310
Cost of Goods Sold	208,725	169,386	154,822	134,235	103,883
Selling and Administrative Expenses	41,280	36,340	31,670	27,450	22,540
Interest:
Interest Expense	(1,070)	(1,370)	(1,330)	(1,100)	(800)
Interest Income	140	155	150	230	140
Income Tax Expense	4,420	3,900	3,610	3,390	2,730
Net Income	21,735	12,939	9,488	6,755	2,497
Per Share of Common Stock:
Net Income	1.10	0.80	0.70	0.50	0.28
Dividends	0.45	0.43	0.39	0.35	0.31
Financial Position
Current Assets, Excluding Merchandise Inventory	\(30,900	\)27,200	\(26,800	\)24,400	$21,800
Merchandise Inventory	24,700	22,400	21,600	19,300	17,000	16,800
Property, Plant, and Equipment, Net	51,600	46,200	40,500	35,000	25,200
Total Assets	107,200	95,800	88,900	78,700	64,000
Current Liabilities	32,600	27,800	28,800	25,600	17,000
Long-term Debt	23,000	21,200	16,800	18,600	12,900
Stockholders’ Equity	51,600	46,800	43,300	35,500	34,100
Financial Ratios
Acid-Test Ratio	0.9	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	22.5%	15.5%	12.8%	10.9%	9.9%
Rate of Return on Common Stockholders’ Equity	44.2%	28.7%	24.1%	19.4%	18.9%

Short Answer

Step by step solution

Step1:Vertical analysis of income statement

Step2:Vertical analysis of Balance Sheet

Step3:Performance and financial position analysis

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Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018
Assets	2018 (\()	2017 (\))

Total current assets	25,000	73,440
Property, Plant and Equipment, Net	153,600	168,300
Other Assets	21,400	64,260
Total Assets	200,000	306,000

Liabilities
Total current liabilities	27,600	49,266
Long term debt	72,400	208,998
Total Liabilities	100,000	258,264

Stockholders’ Equity
Total stockholders’ Equity	100,000	47,736
Total liabilities and stockholders’ equity	200,000	306,000