Chapter 15: Q3RQ (page 835)

Question: What is horizontal analysis, and how is a percentage change computed?

Short Answer

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Answer

It was used for the analysis of horizontal data over the last years to make decisions.

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Definition

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons of percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

How is a percentage change computed?

In horizontal analysis the percent change is computed by Subtracting the base period amount from the analysis period amount, dividing the result by base the period amount then multiplying that amount by 100.

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	THE PADDLE COMPANY Comparative Financial Statements Years Ended December 31			RECREATIONAL LIFE VESTS Comparative Financial Statements Years Ended December 31
Income statement	2019	2018	2017	2019	2018	2017
Net sales revenue	\(430,489	\)425,410		\(410,570	\)383,870
Cost of goods sold	258,756	256,797		299,110	280,190
Gross profit	171,733	168,613		111,460	103,680
Operating expenses	153,880	151,922		78,290	70,830
Operating income	17,853	16,691		33,170	32,850
Interest expenses	865	788		2,780	2,980
Income before income tax	16,988	15,903		30,390	29,870
Income tax expenses	5,137	4,809		8,780	8,630
Net income	\(11,851	\)11,094		\(21,610	\)21,240
Balance sheet

Assets
Cash & Cash Equivalents	\(69,159	\)70,793		\(65,730	\)55,270
Accounts Receivable	44,798	44,452	\(44,104	39,810	38,650	\)36,460
Merchandise Inventory	79,919	66,341	76,363	68,500	65,230	59,930
Other Current Assets	15,494	16,264		24,450	37,630
Total Current Assets	209,370	197,850		198,490	196,780
Long-term Assets	89,834	90,776		116,760	116,270
Total Assets	\(299,204	\)288,626	\(276,482	\)315,250	$$313,050	\(310,640

Liabilities
Current Liabilities	\)69,554	\(60,232		\)90,810	\(90,010
Long-term Liabilities	31,682	29,936		96,310	105,890
Total Liabilities	101,236	90,168		187,120	195,900

Stockholders’ Equity
Common Stock	72,795	80,885		111,530	102,480
Retained Earnings	125,173	117,573		16,600	14,670
Total Stockholders’ Equity	197,968	198,458		128,130	117,150	103,840
Total Liabilities and Stockholder’s Equity	\)299,204	\(288,626		\)315,250	\(313,050

Other data
Market price per share	\)21.38	\(33.82		\)46.37	$51.64
Annual dividend per share	0.32	0.30		0.53	0.45
Weighted average number of shares outstanding	9,000	8,000		9,000	8,000

a. Current ratio	h. Profit margin ratio
b. Cash ratio	i. Asset turnover ratio
c. Inventory turnover	j. Rate of return on common stockholders’ equity
d. Accounts receivable turnover	k. Earnings per share
e. Gross profit percentage	l. Price/earnings ratio
f. Debt ratio	m. Dividend yield
g. Debt to equity ratio	n. Dividend payout

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

Question: What is horizontal analysis, and how is a percentage change computed?

Short Answer

Step by step solution

Definition

How is a percentage change computed?

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