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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:

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: