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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GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017
Net sales revenue	\(461,000	\)424,000
Cost of goods sold	241,000	211,000
Gross profit	220,000	213,000
Operating expenses	137,000	135,000
Income from operations	83,000	78,000
Interest expenses	9,000	13,000
Income before taxes	74,000	65,000
Income tax expenses	18,000	24,000
Net income	\(56,000	\)41,000

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017	2016
Assets
Current assets
Cash	\(99,000	\)98,000
Accounts receivables, Net	108,000	114,000	107,000
Merchandise inventory	146,000	164,000	202,000
Prepaid expenses	20,000	9,000
Total current assets	373,000	385,000
Property, plant, and equipment	211,000	181,000
Total assets	\(584,000	\)566,000	\(602,000

Liabilities
Total current liabilities	\)227,000	\(246,000
Long-term liabilities	117,000	100,000
Total liabilities	344,000	346,000

Stockholder’s equity
Preferred stock, 3%	98,000	98,000
Common stockholder equity, no par	142,000	122,000	89,000
Total liabilities and stockholder’s equity	\)584,000	\(566,000

Cash	\(19,000
Accounts Receivable, Net	82,000
Merchandise Inventory	183,000
Total Assets	638,000
Accounts Payable	102,000
Accrued Liabilities	35,000
Short-term Notes Payable	50,000
Long-term Liabilities	221,000
Net Income	69,000
Common Shares Outstanding	50,000 shares

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

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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