Prepare a vertical analysis for the 2018 and 2019 statements of financial position and income statement for

AA Co.

AA Company
Statement of Financial Position
As at December 31

2018 2019
Amount Percent Amount Percent
Assets
Current Assets
Cash on hand and in Bank 420,000 5.84% 350,000 3.69%
Accounts receivable 110,000 1.53% 50,000 0.53%
Merchandise inventory 840,000 11.68% 960,000 10.13%
Store and Office supplies 80,000 1.11% 100,000 1.05%
Total Current Assets 1,450,000 20.17% 1,460,000 15.40%
Non-current Assets
Property, Plant and Equipment, net 5,540,000 77.05% 7,520,000 79.32%
Investments 200,000 2.78% 500,000 5.27%
Total Noncurrent Assets 5,740,000 79.83% 8,020,000 84.60%
Total Assets 7,190,000 100.00% 9,480,000 100.00%
Liabilities and Shareholders’ Equity
Liabilities
Current Liabilities
Accounts payable 480,000 6.68% 620,000 6.54%
Accrued expenses 140,000 1.95% 100,000 1.05%
Interest payable 75,000 1.04% 60,000 0.63%
Total Current Liabilities 695,000 9.67% 780,000 8.23%
Non-current Liabilities
Loan payable 3,000,000 41.72% 4,800,000 50.63%
Total Liabilities 3,695,000 51.39% 5,580,000 58.86%
Shareholders' Equity
Share capital, P100 par value 2,000,000 27.82% 2,500,000 26.37%
Retained earnings 1,495,000 20.79% 1,400,000 14.77%
Total Shareholders' Equity 3,495,000 48.61% 3,900,000 41.14%
Total Liabilities and Equity 7,190,000 100.00% 9,480,000 100.00%

AA Company
Income Statement
For the Years ended December 31

2018 2019
Amount Percent Amount Percent
NET SALES 10,500,000 100.00% 12,400,000 100.00%
Less: COST OF SALES 6,480,000 61.71% 8,150,000 65.73%
GROSS PROFIT 4,020,000 38.29% 4,250,000 34.27%
Less: EXPENSES
SELLING EXPENSES 1,230,000 11.71% 1,480,000 11.94%
ADMINISTRATIVE EXPENSES 940,000 8.95% 1,020,000 8.23%
INTEREST EXPENSE 240,000 2.29% 250,000 2.02%
TOTAL EXPENSES 2,410,000 22.95% 2,750,000 22.18%
INCOME BEFORE TAX 1,610,000 15.33% 1,500,000 12.10%
Less: Income Tax 483,000 4.60% 450,000 3.63%
NET INCOME 1,127,000 10.73% 1,050,000 8.47%

Additional Information:
a. The fair market value of AA Co.’s stock were P120/share and P80/share as at December 31, 2018 and 2019,
respectively.
b. The company’s retained earnings account was affected only by the income/loss and dividend distribution during 2018
and 2019.
Analysis:
Balance sheet: AA Co. is choosing to finance its growth through issuing additional debt rather than retention of earnings.
Income statement: The company was less profitable in 2019, possibly due to a higher cost. A lower gross profit impacted
the overall profitability of the company.

Interpretation:
Liquidity:
1. In 2018, non-current assets were higher than current assets. This suggests that AA Co. had more of its
investments tied up in long-term assets, which might not be readily convertible to cash in the short term. This
could indicate lower short-term liquidity.
2. In 2019, non-current assets increased while current assets decreased. This situation could further reduce the
company's short-term liquidity, as a larger portion of its assets is locked into long-term investments, making it
potentially more challenging to meet its short-term obligations.
3. The decrease in the fair market value of AA Co.'s stock from P120/share in 2018 to P80/share in 2019 might also
impact the company's ability to generate funds by selling equity. A lower stock price could deter investors,
potentially reducing the liquidity available through equity issuance.

Solvency:
1. In 2018, liabilities were higher than equity. This indicates that AA Co. had a higher proportion of debt relative to
its equity, which could be a sign of higher financial leverage. It may imply a certain level of risk, as the company
needs to service its debt obligations.
2. In 2019, liabilities increased, and equity decreased. This suggests that AA Co. has taken on additional debt or
experienced a reduction in shareholder equity. An increase in liabilities without a corresponding increase in
equity could lead to higher financial risk.

Profitability:
1. The net income as a percentage of net sales decreased from 10.73% to 8.47%, which implies lower profitability.

2. The company managed to control expenses despite its increase, however, a lower gross margin affected the
overall profitability of the company.