Part 2. Horizontal Analysis Foothills Company’s income statements for 2012 and 2
ID: 2490395 • Letter: P
Question
Part 2. Horizontal Analysis Foothills Company’s income statements for 2012 and 2011 are shown below: Foothills Company Income Statements For the Years ending December 31 2012 2011 Sales $ 825,000 $ 700,000 Cost of goods sold 390,000 350,000 Gross profit $ 435,000 $ 350,000 Operating expenses 200,000 130,000 Operating income $235,000 $220,000 Interest expense 80,000 50,000 Income before taxes $ 155,000 $ 170,000 Income tax expense 59,000 64,000 Net income $ 96,000 $ 106,000 a. Prepare a horizontal analysis of Foothill’s income statements, rounding the percentages to one decimal point. Enter your answers in the shaded boxes. $ Change % Change Sales, Cost of goods, sold Gross profit Operating expenses Operating income Interest expense Income before taxes Income tax expense Net income b. Based on your calculations, write a brief interpretation of this analysis.
Part 3. Vertical Analysis Blue Cloud Inc.’s income statements for 2012 and 2011 are shown below: Blue Cloud Inc. Income Statements For the Years ending December 31 2012 2011 Sales $1,500,000 $1,900,000 Cost of goods sold 800,000 950,000 Gross profit $ 700,000 $ 950,000 Operating expenses 330,000 420,000 Operating income $370,000 $530,000 Interest expense 95,000 100,000 Income before taxes $ 275,000 $ 430,000 Income tax expense 96,000 115,000 Net income $ 179,000 $ 315,000 a. Prepare a vertical analysis of Blue Cloud’s income statements, rounding the percentages to one decimal point. Enter your answers in the shaded boxes. 2012 % 2011 % Sales $1,500,000 $1,900,000 Cost of goods sold 800,000 950,000 Gross profit 700,000 950,000 Operating expenses 330,000 420,000 Operating income 370,000 530,000 Interest expense 95,000 100,000 Income before taxes 275,000 430,000 Income tax expense 96,000 115,000 Net income $ 179,000 $ 315,000 b. Based on your calculations, write a brief interpretation of this analysis.
Part 4. Ratio Analysis Blue Cloud Inc.’s 2012 Income Statement and Comparative Balance Sheet follow. Blue Cloud Inc. Income Statement For the Year ending December 31 2012 Sales $1,500,000 Cost of goods sold 800,000 Gross profit $ 700,000 Operating expenses 330,000 Operating income $370,000 Interest expense 95,000 Income before taxes $ 275,000 Income tax expense 96,000 Net income $ 179,000 Comparative Balance Sheet 2012 2011 Cash $ 60,000 $ 75,000 Accounts receivable 190,000 230,000 Inventory 180,000 210,000 Prepaid insurance 70,000 100,000 Total current assets $ 500,000 $ 615,000 Property & equipment 1,020,000 1,130,000 Accumulated depreciation 550,000 600,000 Total property and equipment 470,000 530,000 Total assets $ 970,000 $1,145,000 Accounts payable $ 65,000 $ 110,000 Notes payable 55,000 130,000 Total current liabilities 120,000 240,000 Bonds payable 120,000 60,000 Total liabilities 240,000 300,000 Common stock 620,000 685,000 Retained earnings 110,000 160,000 Total stockholders’ equity 730,000 845,000 Total liability & stockholders’ equity $970,000 $1,145,000 a. Use Blue Cloud’s 2012 Income Statement and Comparative Balance sheet to calculate the ratios below. Enter your answers in the shaded boxes under column a. b. Note if the ratio is a Profitability, Liquidity, or Solvency Ratio. Enter your answers in the shaded boxes under column b. Ratio a. Calculation Answer b. Profitability, Liquidity, or Solvency ratio? Profit margin Debt to assets ratio Current ratio Quick ratio Return on assets Times interest earned Inventory turnover ratio Receivables turnover ratio Debt to equity ratio c. Based on your calculations, write a brief interpretation of this analysis.
Explanation / Answer
Part 2: Horizontal analysis: formula = (2012 figure - 2011 figure)/2011 figure
Brief interpretation: On a year on year basis, sales have increased by 17.9%. However, this increase was offset by the substantial increase of 53.8% in operating expenses. Interest expenses also increased by 60%. This resulted in a 9.4% fall in net income of Foothill's Company in the year 2012, compared to the the company's net income in 2011.
2012 2011 % change Sales 825,000 700,000 17.9% Less: COGS 390,000 350,000 11.4% Gross profit 435,000 350,000 24.3% less: Operating expenses 200,000 130,000 53.8% Operating income 235,000 220,000 6.8% Less: interest expenses 80,000 50,000 60.0% Income before taxes 155,000 170,000 -8.8% Less: tax expenses 59,000 64,000 -7.8% Net income 96,000 106,000 -9.4%