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1. Explain the purpose and the key items on the balance sheet. 2. Explain and complete vertical and horizontal analysis. LU13-1: Balance Sheet -- Report as of a Particular Date LEARNING UNIT OBJECTIVES LU 13-1: Income Statement -- Report for a Specific Period of Time 1. Explain the purpose and the key items on the income statement. 2. Explain and complete vertical and horizontal analysis. 13-2 LU 13-3: Trend and Ratio Analysis 1. Explain and complete a trend analysis. 2. List, explain, and calculate key financial ratios.

ACCOUNTING EQUATION Accounting Equation: Assets = Liabilities + Owner’s Equity 13-3

BALANCE SHEET Gives a financial picture of what a company is worth as of a particular date. AssetsLiabilities + Owner’s Equity = (How much the company owns) (How much the owner is worth) (How much the company owes) 13-4

BALANCE SHEET Assets – Liabilities = Owner’s equity (capital) \$10,000 - \$2,500 = \$7,500 13-5

ELEMENTS OF THE BALANCE SHEET (FIGURE 13.1) MOOL COMPANY Balance Sheet December 31, 2014 Assets Liabilities a. Current assets: a. Current liabilities: b. Cash \$ 7,000 b. Accounts payable \$ 80,000 c. Accounts receivable 9,000 c. Salaries payable 12,000 d. Merchandise inventory 30,000 d. Total current liabilities \$ 92,000 e. Prepaid expenses 15,000 e. Long-term liabilities: f. Total current assets \$61,000 f. Mortgage note payable 58,000 g. Plant and equipment: g. Total liabilities \$150,000 h. Building (net) \$60,000 i. Land 84,000 Stockholders’ Equity j. Total plant and equipment 144,000 a. Common stock \$ 20,000 b. Retained earnings 35,000 c. Total stockholders’ equity 55,000 k. Total assets \$205,000 d. Total liab. and stkhlds’ equity \$205,000 Assets broken down into current assets and plant and equipment Liabilities broken down into current and long-term Total of current assets and plant and equipment. (Total is double-ruled) Total of all liabilities and stockholders’ equity. 13-6

VERTICAL ANALYSIS AND THE BALANCE SHEET Step 2. Divide each liability and stockholders’ equity (the portions) as a percent of total liabilities and stockholders’ equity (the base). Round as indicated. Step 1. Divide each asset (the portion) as a percent of total assets (the base). Round as indicated. 13-7

COMPARATIVE BALANCE SHEET: VERTICAL ANALYSIS (FIGURE 13.2) ROGER COMPANY Comparative Balance Sheet December 31, 2013 and 2014 2014 2013 AmountPercentAmountPercent Assets Current Assets: Cash\$22,000 25.88\$18,000 22.22 Accounts Receivable 8,000 9.41 9,000 11.11 Merchandise inventory 9,000 10.59 7,000 8.64 Prepaid rent 4,000 4.71 5,000 6.17 Total current assets\$43,000 50.59\$39,000 48.15* Plant and equipment: Building (net)\$18,000 21.18\$18,000 22.22 Land 24,000 28.24 24,000 29.63 Total plant and equipment\$42,000 49.41*\$42,000 51.85 Total assets\$85,000 100.00\$81,000 100.00 * Due to rounding 13-8

COMPARATIVE BALANCE SHEET: VERTICAL ANALYSIS (FIGURE 13.2) ROGER COMPANY Comparative Balance Sheet December 31, 2013 and 2014 2014 2013 AmountPercentAmountPercent Liabilities Current liabilities: Accounts payable \$14,000 16.47 \$ 8,000 9.88 Salaries payable 18,000 21.18 17,000 20.99 Total current liabilities \$32,000 37.65 \$25,000 30.86* Long-term liabilities: Mortgage note payable \$12,000 14.12 \$20,000 24.69 Total liabilities \$44,000 51.76* \$45,000 55.56* Stockholders’ Equity Common stock \$20,000 23.53 \$20,000 24.69 Retained earnings 21,000 24.7116,000 19.75 Total stockholders’ equity \$41,000 48.24 \$36,000 44.44 Total liabilities and stockholders’ equity \$85,000 100.00 \$81,000 100.00 * Due to rounding 13-9

PREPARING A HORIZONTAL ANALYSIS OF A COMPARATIVE BALANCE SHEET Step 1. Calculate the increase or decrease (portion) in each item from the base year. Step 2. Divide the increase or decrease in Step 1 by the old or base year. Step 3. Round as indicated. 13-10

COMPARATIVE BALANCE SHEET: HORIZONTAL ANALYSIS (FIGURE 13.3) ABBY ELLEN COMPANY Comparative Balance Sheet December 31, 2013 and 2014 Increase (decrease) 2014 2013AmountPercent Assets Current Assets: Cash\$ 6,000\$ 4,000\$ 2,000 50.00* Accounts receivable 5,000 6,000 (1,000) -16.67 Merchandise inventory 9,000 4,000 5,000 125.00 Prepaid rent 5,000 7,000 (2,000) -28.57 Total current assets\$25,000\$21,000 \$ 4,000 19.05 Plant and equipment: Building (net)\$12,000 \$12,000 0 0 Land 18,000 18,000 0 0 Total plant and equipment\$30,000 \$30,000 0 0 Total assets\$55,000 \$51,000\$4,000 7.84 13-11

COMPARATIVE BALANCE SHEET: HORIZONTAL ANALYSIS (FIGURE 13.3) ABBY ELLEN COMPANY Comparative Balance Sheet December 31, 2013 and 2014 Increase (decrease) 2014 2013AmountPercent Liabilities Current liabilities: Accounts payable\$ 3,200\$ 1,800\$1,400 77.78 Salaries payable 2,900 3,200 (300) -9.38 Total current liabilities\$ 6,100\$ 5,000 \$1,100 22.00 Long-term liabilities: Mortgage note payable17,000 15,0002,000 13.33 Total liabilities \$ 23,100\$20,000\$3,100 15.50 Owner’s Equity Abby Ellen, capital\$31,900\$31,000\$ 9002.90 Total liabilities and owner’s equity \$55,000 \$51,000\$4,000 7.84 13-12

INCOME STATEMENT – REPORT FOR A SPECIFIC PERIOD OF TIME Income Statement -- A financial report that tells how well a company is performing (its profitability or net profit) during a specific period of time (month, year, etc). Service Business: Net income = Revenues -- Operating expenses Retail Business: Revenues (sales) -- Cost of merchandise sold = Gross profit from sales -- Operating expenses = Net income (profit) Income Statement \$ 13-13

INCOME STATEMENT 13-14

MOOL COMPANY Income Statement For Month Ended December 31, 2014 Revenues a. Gross Sales \$22,080 b. Less: Sales returns and allowances\$ 1,082 c. Sales discounts4321,514 d. Net Sales Cost of merchandise (goods) sold: \$20,566 a. Merchandise Inventory 12/1/2014\$1,248 b. Purchases\$10,512 c. Less: Purchases returns and allowances \$336 d. Less: Purchase discounts 204 540 e. Cost of net purchases9,972 f. Cost of merchandise (goods available for sale) \$11,220 g. Less: Merchandise inventory 12/31/2014 1,600 h. Cost of merchandise (goods sold)9,620 Gross profit from sales\$10,946 Operating expenses: a. Salary \$2,200 b. Insurance 1,300 c. Utilities 400 d. Plumbing 120 e. Rent 410 f. Depreciation 200 g.Total operating expenses4,630 Net income\$ 6,316 INCOME STATEMENT (FIGURE 13.4) 13-15

KEY CALCULATIONS ON INCOME STATEMENT Net sales = Gross sales -- Sales returns allowances -- Sales discounts Net income = Gross profit -- Operating expenses Gross profit from sales = Net sales -- Cost of merchandise (goods) sold Cost of Net purchases merchandise = Beginning + (purchase less -- Ending (goods) sold inventory returns & discounts) inventory 13-16

INCOME STATEMENT VERTICAL ANALYSIS (FIGURE 13.5) ROYAL COMPANY Comparative Income Statement For Years Ended December 31, 2013 and 2014 2014 Percent 2013 Percent of net of net Net Sales\$45,000 100.00\$29,000 100.00* Cost of merchandise sold 19,000 42.22 12,000 41.38 Gross profit from sales\$26,000 57.78\$17,000 58.62 Operating expenses: Depreciation \$1,000 2.22\$ 500 1.72 Selling and Advertising 4,200 9.33 1,600 5.52 Research 2,900 6.44 2,000 6.90 Miscellaneous 500 1.11 200.69 Total operating expenses \$8,600 19.11* \$ 4,300 14.83 Income before interest and taxes\$17,400 38.67\$12,700 43.79 Interest expense 6,000 13.33 3,000 10.34 Income before taxes\$11,400 25.33* \$ 9,700 33.45 Provision for taxes 5,500 12.22 3,000 10.34 Net income \$ 5,900 13.11 \$ 6,700 23.10* * Off due to rounding 13-17

HORIZONTAL ANALYSIS INCOME STATEMENT (FIGURE 13.6) FLINT COMPANY Comparative Income Statement For Years Ended December 31, 2013 and 2014 2014 2013 Increase (decrease) Amount Percent Sale\$ 90,000 \$80,000\$10,000 Sales returns and allowances 2,000 2,000 0 Net Sales\$88,000 \$78,000\$10,000 + 12.82 Cost of merchandise sold45,000 40,000 5,000+ 12.50 Gross profit from sales\$43,000 \$38,000\$ 5,000 + 13.16 Operating expenses: Depreciation\$ 6,000 \$ 5,000\$ 1,000 + 20.00 Selling and Administrative16,000 12,000 4,000 + 33.33 Research 600 1,000 (400) - 40.00 Miscellaneous1,200 500 700 + 140.00 Total operating expenses\$23,800 \$18,500 \$ 5,300 + 28.65 Income before interest and taxes\$19,200 \$19,500\$ (300) - 1.54 Interest expense 4,000 4,000 0 Income before taxes\$15,200\$15,500\$ (300) - 1.94 Provision for taxes3,800 4,000(200) - 5.00 Net income\$11,400 \$11,500\$ (100) -.87 13-18

COMPLETING A TREND ANALYSIS Trend Analysis – Analyzes the changes that occur by expressing each number as a percent of the base year. Step 1. Select the base year (100%). Step 2. Express each amount as a percent of the base year amount (rounded to the nearest whole percent). Each Item Base Amount 13-19

TREND ANALYSIS Given (base year 2012) 2015201420132012 Sales\$621,000\$460,000\$340,000\$420,000 Gross Profit 182,000 141,000 112,000 124,000 Net Income 48,000 41,000 22,000 38,000 Trend Analysis 2015201420132012 Sales*148%110%81%100% Gross Profit14711490100 Net Income12610858100 \$340,000 \$420,000D * Round to nearest whole percent 13-20 Sales of 2013 were 81% of the sales of 2012

RATIO ANALYSIS 13-21