ACCT212 Analysis Exercises Discussions

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ACCT212 Analysis Exercises Discussions
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ACCT212 Analysis Exercises Discussions

ACCT212 Analysis Exercises Discussions

Week 7 All Students Posts 53 Pages 

Let’s start with Exercise 13-19A by preparing a common-size income statement for the McMahon Music Co. Do this in Excel. Do not post your spreadsheet in the discussion, but rather, place a screenshot of it. How did you format the cells? Any suggestions on where to obtain assistance with building the spreadsheet?

Common-size income statements can be prepared in two ways: Vertical Analysis and Horizontal Analysis.  Under vertical common-size analysis, each item of income statement is expressed as a percentage of total revenue for the period. This analysis is conducted to analyze how much a certain item has consumed from or contributed to total revenue. Under the Horizontal Analysis each item is expressed a percentage of similar corresponding item from base period. This analysis help us determine the change in each item over a period of time.

1 Vertical common-size income statement

Preparing vertical common-size income statements is pretty straight-forward. Consider the following example income statement:

Pak Accountants Inc.
Income Statement as at _________
Sales850,000
Cost of Sales(730,000)
Gross profit120,000
Administrative expenses(35,000)
Distribution expenses(12,000)
Operating profit73,000
Interest expense(11,000)
Profit before tax62,000
Tax(9,000)
Profit after tax53,000

Take each item and divide it over sales amount and multiply it to 100 to get the percentage. For example, dividing cost of sales over sales will give us 0.8588 [730,000 / 850,000]. Multiplying 0.8588 with 100 gives us 85.88%.

Remember the figures mentioned in brackets mean they are subtracted. This adds to the understanding of user as they can clearly see what figures are being deducted. Personally I like to keep the brackets with percentages as well so that users can understand these figures pertain to expenses or anything causing the profits/revenue to reduce.

Following shows the income statement with workings and percentages calculated:

Pak Accountants Inc.
Income Statement as at _________
$Working%
Sales850,000850,000/850,000100 %
Cost of Sales(730,000)(730,000)/850,000(85.88) %
Gross profit120,000120,000/850,00014.12 %
Administrative expenses(35,000)(35,000)/850,000(4.12) %
Distribution expenses(12,000)(12,000)/850,000(1.41) %
Operating profit73,00073,000/850,0008.59 %
Interest expense(11,000)(11,000)/850,000(1.29) %
Profit before tax62,00062,000/850,0007.29 %
Tax(9,000)(9,000)/850,000(1.06) %
Profit after tax53,00053,000/850,0006.24 %