Q24PGB - Horngren'S Financial And Managerial Accounting

Question

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.

Step-by-Step Solution

Answer

(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

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