Financial Statements Analysis Fall term 2021-2022

TUTORIAL 4

BASICS OF ANALYSIS

Questions:

1 Brown Company earned 5.5% on sales in 2021. What further information would be needed
to evaluate this result?

2 Suppose you are comparing two firms within an industry. One is large and the other is
small. Will relative or absolute numbers be of more value in each case? What kinds of
statistics can help evaluate relative size?

3 Sometimes manufacturing firms have only raw materials and finished goods listed on their
balance sheets. This is true of Avon Products, a manufacturer of cosmetics, and it might be
true of food canners also. Explain the absence of work in process.

4 Using these results for a given ratio, compute the median, upper quartile and lower
quartile: 14%, 13.5%, 13%, 11.8%, 10.5%, 9.5%, 9.3%, 9%, 7%.

Problems:

Problem 1:

Income statement

Elizabeth Company

For the year ended December 31, 2021

2021 2020
Net sales $718,500 $640,000
Cost of goods sold 580,000 515,000
Gross profit 138,500 125,000
Operating expenses
Selling expenses 71,000 65,000
General and administrative expenses 4,000 2,500
75,000 67,500
Earnings before income taxes 63,500 57,500
Income taxes 30,000 28,000
Net earnings 33,500 29,500
Required:

1. Prepare a vertical common-size analysis of this statement for 2021. Round up to the
second decimal.
2. Prepare a horizontal common-size analysis of this statement with 2020 as base year.
Round up to the second decimal.

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 Financial Statements Analysis Fall term 2021-2022

Problem 2: Consider the following change analysis table:

Change Analysis

Item Year 1 Year 2 Amount Percent

1 - 3 000

2 6 000 (4 000
)

3 (7 000) 4 000

4 4 000 -

5 8 000 10 000

Required: Determine the absolute change and the percentage for these items.

Problem 3: Presented below are the comparative statements of income of Rapid Retail
Company for the years ended December 31, 2021 and 2020:

Rapid Retail Comparative Statements of Income

December 31 Increase (Decrease)

(In thousands of dollars) 2021 2020 Dollars Percent

Net sales 30 000 28 000

Cost of goods sold 20 000 19 500

Gross profit 10 000 8 500

Selling, general and 3 000 2 900

administrative expense

Operating income 7 000 5 600

Interest expense 100 80

Income before taxes 6 900 5 520

Income tax expense 2 000 1 600

Net income 4 900 3 920

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 Financial Statements Analysis Fall term 2021-2022

Required: Complete the increase (decrease) in dollars and percent. Comment.