Gibson, Financial Reporting & Analysis, 11e

Chapter 5
Basics of Analysis

To The Net

1.
Years Ended December 31
In Millions
2006 2005 2004
(In millions)
Operating revenue:
Ocean transportation $936 $873 $846
Logistics services 444 432 377
Property leasing 95 79 71
Property sales 8 98 81
Agribusiness 124 121 111
Total revenue $1,607 $1,603 $1,486

Horizontal Common-Size
Years Ended December 31
2006 2005 2004
Operating revenue:
Ocean transportation 110.6 103.2 100.0
Logistics services 117.8 114.6 100.0
Property leasing 133.8 111.3 100.0
Property sales 9.9 121.0 100.0
Agribusiness 111.7 109.0 100.0
Total revenue 108.1 107.9 100.0

Comment Property leasing had material gains

Vertical Common-Size*
Years Ended December 31
2006 2005 2004
Operating revenue:
Ocean transportation 58.2 54.5 56.9
Logistics services 27.6 26.9 25.3
Property leasing 5.9 4.9 4.8
Property sales .5 6.1 5.5
Agribusiness 7.7 7.5 7.5
Total revenue 100.0 100.0 100.0

Comment Ocean transportation is the major segment and gaining

*Some rounding differences

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 Gibson, Financial Reporting & Analysis, 11e

2.
Consolidated Statements of Earnings
(In Millions)
March 3, Feb. 25, Feb 26,
2007 2006 2005
Revenue $35,934 $30,898 $27,433
Cost of goods sold 27,165 23,122 20,938
Gross Profit 8,769 7,726 6,495
Selling, general, and administrative expense 6,770 6,082 5,053
Operating income 1,999 1,644 1,442

Horizontal Common-Size
Consolidated Statements of Earnings
March 3, Feb. 25, Feb. 26,
2007 2006 2005
Revenue 131.0 112.6 100.0
Cost of goods sold 129.7 110.4 100.0
Gross Profit 135.0 119.0 100.0
Selling, general, and administrative expense 134.0 120.4 100.0
Operating income 138.6 114.0 100.0

Note: Operating income increased materiality more than revenue

Vertical Common-Size
Consolidated Statements of Earnings
March 3, Feb. 25, Feb. 26,
2007 2006 2005
Revenue 100.0 100.0 100.0
Cost of goods sold 75.6 74.8 76.3
Gross Profit 24.4 25.0 23.7
Selling, general, and administrative expense 18.8 19.7 18.4
Operating income 5.6 5.3 5.3

Note: A good increase in operating income

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3.
Consolidated Balance Sheets
(In Millions)
December 31,
2006 2005
Liabilities and stockholders’ equity
Total current liabilities $2,532 $1,899
Long-term debt 1,247 1,480
Other long-term liabilities 153 71
Stockholders’ equity
Common stock 4 4
Treasury stock, at cost (252) -----
Additional paid-in capital 2,517 2,263
Accumulated other comprehensive income (loss) (1) 6
Accumulated deficit (1,837) (2,027)
Total stockholder’s equity 431 246
Total liabilities and stockholders’ equity $4,363 $3,696

Horizontal Common-Size
December 31,
2006 2005
Liabilities and stockholders’ equity:
Total current liabilities 133.3 100.0
Long-term debt .8 100.0
Other long-term liabilities 215.5 100.0
Stockholders’ equity
Common stock 100.0 100.0
Treasury stock, at cost N/A 100.0
Additional paid-in capital 111.2 100.0
Accumulated other comprehensive income (loss) N/A 100.0
Accumulated deficit 90.6 100.0
Total stockholders’ equity 175.2 100.0
Total liabilities and stockholders’ equity 118.0 100.0

Note: Material increases in total current liabilities,

other long-term liabilities, additional paid-in capital,
total stockholders’ equity, and total liabilities and
stockholders’ equity.

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 Gibson, Financial Reporting & Analysis, 11e

Vertical Common-Size
December 31,
2006 2005
Liabilities and stockholders’ equity:
Total current liabilities 55.0 51.4
Long-term debt 28.6 40.0
Other long-term liabilities 3.5 1.9
Stockholders’ equity
Common stock .0 .0
Treasury stock, at cost (5.8) -----
Additional paid-in capital 57.7 61.2
Accumulated other comprehensive income (loss) .0 .0
Accumulated deficit (42.1) (54.8)
Total stockholders’ equity 9.9 6.7
Total liabilities and stockholders’ equity 100.0 100.0

Note: Material increase in total current liabilities.

Material decrease in long-term debt and additional paid-in
capital.

4.
Consolidated Statement of Income
Years Ended February 3, 2007 and January 28, 2006
(In Millions)

Horizontal Common-Size
Februar January
y 3, 28, 2006 Increase
2007 (Decrease)
53 52 Weeks Dollar Percen
Weeks s t
Sales 109.2 100.0 5,578 9.2
Merchandise costs,
including
advertising,
warehousing, and
transportation,
excluding items
shown separately below 110.0 100.0 4,550 10.0
Operating, general and
administrative 107.4 100.0 812 7.4
Rent 98.2 100.0 (12) (1.8)
Depreciation and
amortization 100.6 100.0 7 .6
Operating profit 109.9 100.0 201 9.9

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 Gibson, Financial Reporting & Analysis, 11e

Note: Sales, merchandise etc., and operating profit increased

materially.

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 Gibson, Financial Reporting & Analysis, 11e

5.
Consolidated Statements of Operations
Years Ended December 31, 2005, and December 31, 2006
(In thousands)

Increase
(Decrease)
Dec. 31, Dec. 31, Percen
2005 2006 Dollars t
Revenues 1,168,0
100.0 122.2 11 22.2
Cost of revenues 100.0 127.6 579,522 27.6
Gross profit 100.0 118.6 588,489 18.6
Operating expenses:
Sales and marketing 100.0 127.9 288,312 27.9
Product development 100.0 146.3 263,623 46.3
General and
administrative 100.0 155.0 187,725 55.0
Amortization of
intangibles 100.0 114.3 15,591 14.3
Total operating
expense 100.0 136.8 755,248 36.8
Income from (166,759
operations 100.0 84.9 ) (15.1)

Horizontal:
Material increases in all areas, except income from operations.

Dollar Change:
Huge dollar changes. This was particularly true of revenues.

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 Gibson, Financial Reporting & Analysis, 11e

QUESTIONS

5 - 1. A ratio is a fraction comparing two numbers. Ratios make the comparisons in

relative, rather than absolute, terms, which helps alleviate the problem of size
difference.

5 - 2. a. Liquidity is the ability to meet current obligations. Short-term creditors

such as banks or suppliers would be particularly interested in these
ratios.

b. Borrowing capacity measures the protection of long-term creditors.

Long-term bond holders would be particularly interested in these ratios.
c. Profitability means earning ability. Investors would be particularly
interested in these ratios

5 - 3. Comparisons of historical data, industry average, earnings of competitors, etc.

5 - 4. An absolute change would be plus or minus X dollars; a percentage change

would be plus or minus X percent of the base. Percentage changes usually
give better measures because they recognize the difference in the size of the
base.

5 - 5. Horizontal analysis expresses an item in relation to that same item for a

previous base year. This analysis measures change over time.

Example
In 2008, sales were $750,000; in 2007, they were $500,000. Horizontal
analysis shows 2008 sales as 150% of those in 2007.

Vertical analysis compares one item with another base item for that same
year.

Example
In 2008, selling expenses were $75,000 and sales were $750,000. Vertical
analysis would show selling expenses as 10% of 2008 sales.

5 - 6. Trend analysis involves comparing the past to the present. It can be used
both for ratios and absolute figures.

5 - 7. When comparing two firms of different size, relative figures are most
meaningful. These include ratios and common-size analysis. The relative
amounts of sales, assets, profits, or market share help evaluate relative size.

5 - 8. While managers make great use of financial reports, investors, creditors,

employers, suppliers, regulators, auditor, and consumers also use financial
reports.

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 Gibson, Financial Reporting & Analysis, 11e

5 - 9. Managers analyze data to study profitability and the overall financial position
of the firm. Investors study profitability and the chance to earn on their
investment. Creditors study the ability of the firm to handle debt.

5 -10. a. Best Buy Co. (Exhibit 5-3)

Current assets is the single-largest asset category. This would be typical

for a retailer. For Best Buy Co., the current assets is extra high because
of the substantial amount in short-term investments. Property and
equipment will often be a high category unless it is held down by leases
which limit investment in productive (capital) assets.

Kelly Services, Inc. (Exhibit 5-4)

Current assets is the single-largest asset category. This would be typical

for a service firm.

Cooper Tire & Rubber Company (Exhibit 5-5)

Current assets is the largest asset category. For Cooper Tire, current
assets is extra high because of the substantial amount in cash and cash
equivalents in 2005. Property, plant, and equipment would typically also
be high for a manufacturer.

b. Cooper Tire & Rubber Company

It would not be unusual that a manufacturing firm has a large amount in

current assets in relation to current liabilities because of receivables and
inventory. We would also expect a service firm to have a large amount in
current assets in relation to current liabilities.

5.11. A manufacturing firm will have raw materials, work in process, finished
goods, and supplies. A retail firm will only have merchandise inventories.

5 -12. Some types of products must be processed and immediately packaged for
sale. They cannot be held in the processing state. Each night, all raw
materials must be converted to finished goods. Cosmetics, such as nail
polish, would dry up overnight. Foods might spoil. They, therefore, cannot be
left in a semi-finished state.

5 -13. Median 10.5%; upper quartile 13%; lower quartile 9.3%.

5 -14. Reference Book of Corporate Managements

5 -15. a. Eleven.

b. Manufacturing, construction, transportation, retail trade, banking, and

wholesale trade.
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 Gibson, Financial Reporting & Analysis, 11e

5 -16. a. Yes. The Department of Commerce Financial Reports includes industry

sales. We could relate the sales of the firm in question to the total
industry amount.

b. Yes. The Department of Commercial Financial Report includes total

assets for the total industry. We could relate the total assets of the firm
in question to the total in the industry.

5 -17. a. The SIC is the Standard Industrial Classification. It was developed for
use in the classification of establishments by the type of activity in which
they are engaged.

Determining a company's SIC is a good starting point in your search of a

company, industry, or product. Many library sources use the SIC
number as a method of classification. Thus, knowing a company's SIC
will be necessary in order to use some library sources.

b. The North American Industry Classification system (NAICS) was created

jointly by the United States, Canada, and Mexico. NAICS provides
enhanced industry comparability among the three NAFTA trading
partners.

NAIS divides the economy into twenty sectors. Industries within these
sectors are grouped according to the production criterion. Four sectors
are largely goods-producing industries and sixteen sectors are entirely
services-producing industries.

5 -18. Standard & Poor's Register of Corporations, Directors and Executives, Volume
2, Section 5, lists the officer deaths that have been reported to the publisher.

5 -19. Standard & Poor's Analyst's Handbook

5 -20. Value Line Investment Survey

5 -21. The Securities Owner's Stock Guide

5.22. Sources that contain a dividend record of payments are the following:
1. Mergent dividend record, and
2. Standard & Poor’s Annual Dividend Record

5 -23. Standard & Poor’s Statistical Serviced

5 -24. The Standard & Poor's Register of Corporations, Directors and Executives,
Volume 2, contains information on principal business affiliations of officers.

105
5 -25. 1. Standard & Poor's Industry Survey
2. Value Line Investment Survey

5 -26. Thomas Register of American Manufacturers

106
PROBLEMS

PROBLEM 5-1

a.
Best Buy Co., Inc.
Vertical Common-Size Balance Sheet

In Percentage*
March 3, February 25,
2007 2006
Assets
Current assets
Cash and cash equivalents 8.9 6.3
Short-term investments 19.1 25.6
Receivables 4.0 3.8
Merchandise inventories 29.7 28.1
Other current assets 5.2 3.4
Total current assets 66.9 67.3
Property and equipment
Land and buildings 5.2 4.9
Leasehold improvements 11.3 11.2
Fixtures and equipment 19.4 24.4
Property under capital lease .2 .3
36.1 40.8
Less accumulated depreciation 14.5 17.9
Net property and equipment 21.7 22.9
Goodwill 6.8 4.7
Tradenames .6 .4
Long-term investments 2.3 1.8
Other assets 1.7 2.9
Total assets 100.0 100.0

*Some rounding differences

107
Problem 5-1 Continued

In Percentage
March 3, February 25,
2007 2006
Liabilities and shareholders’ equity
Current liabilities
Accounts payable 29.0 27.3
Unredeemed gift card liabilities 3.7 4.0
Accrued compensation and related
expense 2.4 3.0
Accrued liabilities 7.3 7.4
Accrued income taxes 3.6 5.9
Short-term debt .3 0
Current portion of long-term debt .1 3.5
Total current liabilities 46.4 51.0
Long-term liabilities 3.3 3.1
Long-term debt 4.3 1.5
Minority interest .3 -----
Shareholders’ equity
Common stock .4 .4
Additional paid-in capital 3.2 5.4
Retained earnings 40.6 36.3
Accumulated other comprehensive
income 1.6 2.2
Total shareholders’ equity 45.7 44.3
Total liabilities and shareholders’ equity 100.0 100.0

108
Problem 5-1 Continued

b.
Best Buy Co., Inc.
Horizontal Common-Size Balance Sheet

In Percentage
March 3, February 25,
2007 2006
Assets
Current assets
Cash and cash equivalents 161.3 100.0
Short-term investments 85.1 100.0
Receivables 122.0 100.0
Merchandise inventories 120.7 100.0
Other current assets 174.1 100.0
Total current assets 113.7 100.0
Property and equipment
Land and buildings 121.6 100.0
Leasehold improvements 116.2 100.0
Fixtures and equipment 90.6 100.0
Property under capital lease 97.0 100.0
101.4 100.0
Less accumulated depreciation 92.6 100.0
Net property and equipment 108.3 100.0
Goodwill 165.0 100.0
Tradenames 184.1 100.0
Long-term investments 145.9 100.0
Other assets 67.0 100.0
Total assets 114.4 100.0

109
Problem 5-1 Continued

In Percentage
March 3, February 25,
2007 2006
Liabilities and shareholders’ equity
Current liabilities
Accounts payable 121.6 100.0
Unredeemed gift card liabilities 105.8 100.0
Accrued compensation and related
expense 93.8 100.0
Accrued liabilities 112.8 100.0
Accrued income taxes 69.6 100.0
Short-term debt N/A N/A
Current portion of long-term debt 4.5 100.0
Total current liabilities 104.0 100.0
Long-term liabilities 118.8 100.0
Long-term debt 331.5 100.0
Minority interests N/A N/A
Shareholders’ equity
Common stock 98.0 100.0
Additional paid-in capital 66.9 100.0
Retained earnings 128.0 100.0
Accumulated other comprehensive
income 82.8 100.0
Total shareholders’ equity 118.0 100.0
Total liabilities and shareholders’ equity 114.4 100.0

110
Problem 5-1 Continued

c. Vertical Common-Size
Assets:
Material increase in cash and cash equivalents
Material decrease in short-term investments
Material decrease in fixtures and equipment
Material increase in goodwill
Material increase in long-term investments

Liabilities and Shareholder’s Equity:

Material decrease in accrued income taxes
Material decrease in current portion of long-term debt
Material increase in long term debt
Material decrease in additional paid-in capital

Horizontal Common-Size
Assets:
Material increase in many items including cash and cash equivalents,
receivables, merchandise inventory, other current assets, land and
buildings, goodwill, tradenames, and long-term
investments
Material decrease in short-term investments, and fixtures and equipment

Liabilities and shareholders equity:

Material increase in accounts payable, accrued liabilities, long-term liabilities,
long-term debt, retained earnings, total shareholders’ equity, and
total liabilities and shareholders’ equity
Material decrease in accrued income taxes
Material decrease in current portion of long-term debt
Material decrease in additional paid-in capital
Material decrease in accumulated other comprehensive income

111
PROBLEM 5-2

a.
Best Buy Co., Inc.
Consolidated Statements of Earnings
Vertical Common-Size

For the fiscal years ended March 3, February 25, February 26,
2007 2006 2005
Revenue 100.0 100.0 100.0
Cost of goods sold 75.6 75.0 76.3
Gross profit 24.4 25.0 23.7
Selling, general and administrative
expenses 18.8 19.7 18.4
Operating income 5.6 5.3 5.3
Net interest income .3 .2 .0
Gain on investments .1 ----- -----
Earnings from continuing operations
before income tax expense 5.9 5.6 5.3
Income tax expense 2.1 1.9 1.9
Minority interest in earnings .0 ----- -----
Earnings from continuing operations 3.8 3.7 3.4
Gain on disposal of discontinued
operations, net of tax ----- ----- .2
Net earnings 3.8 3.7 3.6

112
Problem 5-2 Continued

b.
Best Buy Co., Inc.
Consolidated Statements of Earnings
Horizontal Common-Size

For the fiscal years ended March 3, February 25, February 26,
2007 2006 2005
Revenue 131.0 112.4 100.0
Cost of goods sold 129.7 110.4 100.0
Gross profit 135.0 119.0 100.0
Selling, general and administrative
expenses 134.0 120.4 100.0
Operating income 138.6 114.0 100.0
Net interest income Base not Meaningful 100.0
Gain on investment N/A ----- -----
Earnings from continuing operations
before income tax expense 147.6 119.3 100.0
Income tax expense 147.7 114.1 100.0
Minority interest in earnings N/A ----- -----
Earnings from continuing operations 147.4 122.1 100.0
Gain on disposal of discontinued
operations, net of tax N/A (100.0) 100.0
Net earnings 139.9 115.9 100.0

c. Vertical Common-Size
Operating income relative to revenue has increased from 2006 to 2007.
Earnings from continuing operations before income tax
expense has consistently increased from 2005 to 2007.

Horizontal Common-Size
Material increase in all items computed

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PROBLEM 5-3

a.
Kelly Securities, Inc. and Subsidiaries
Balance Sheets
December 31, 2006 and December 31, 2005
Vertical Common-Size Analysis

In Percentage
2006 2005
Assets
Current assets
Cash and equivalents 8.1 4.9
Trade accounts receivable, less
allowances 57.0 61.2
Prepaid expenses and other current assts 3.1 3.6
Deferred taxes 2.0 2.6
Total current assets 70.2 72.3
Property and equipment
Land and buildings 4.2 4.5
Equipment, furniture, and leasehold
improvements 21.2 22.7
Accumulated depreciation (13.8) (14.5)
Net property and equipment 11.6 12.6
Noncurrent deferred taxes 2.4 1.7
Goodwill, net 6.6 6.7
Other assets 9.2 6.7
Total assets 100.0 100.0

114
Problem 5-3 Continued

(In Percentage)
Liabilities and Stockholders’ Equity 2006 2005
Current liabilities:
Short-term borrowings 4.7 4.3
Accounts payable 9.0 8.4
Accrued payroll and related taxes 18.7 20.0
Accrued insurance 1.6 2.6
Income and other taxes 4.6 4.3
Total current liabilities 38.7 39.7
Noncurrent liabilities
Accrued insurance 3.9 4.2
Accrued retirement benefits 4.9 4.4
Other long-term liabilities .9 .6
Total noncurrent liabilities 9.7 9.1
Stockholders’ equity
Capital stocks $1.00 par value
Class A common stock 2.5 2.8
Class B common stock .2 .3
Treasury stock
Class A common stock (5.3) (6.9)
Class B common stock (.0) (.0)
Paid-in capital 2.2 2.1
Earnings invested in the business 50.0 52.4
Accumulated other comprehensive income 2.1 .6
Total stockholders’ equity 51.6 51.2
Total liabilities and stockholders’ equity 100.0 100.0

115
Problem 5-3 Continued

b.
Kelly Services, Inc. and Subsidiaries
Balance Sheets
December 31, 2006 and December 31, 2005
Horizontal Common-Size Analysis

In Percentage
Assets 2006 2005
Current assets
Cash and equivalents 185.8 100.0
Trade accounts receivable, less allowances 104.3 100.0
Prepaid expense and other current assets 95.2 100.0
Deferred taxes 87.4 100.0
Total current assets 108.7 100.0
Property and equipment
Land and buildings 105.0 100.0
Equipment, furniture, and leasehold improvements 104.5 100.0
Accumulated depreciation 106.1 100.0
Net property and equipment 102.7 100.0
Noncurrent deferred taxes 160.4 100.0
Goodwill, net 109.4 100.0
Other assets 154.4 100.0
Total assets 111.9 100.0

116
Problem 5-3 Continued

In Percentage
Liabilities and Stockholders’ Equity 2006 2005
Current liabilities:
Short-term borrowings 121.7 100.0
Accounts payable 120.3 100.0
Accrued payroll and related taxes 104.2 100.0
Accrued insurance 70.9 100.0
Income and other taxes 120.1 100.0
Total current liabilities 109.1 100.0
Noncurrent Liabilities
Accrued insurance 105.1 100.0
Accrued retirement benefits 125.3 100.0
Other long-term liabilities 167.8 100.0
Total noncurrent liabilities 118.9 100.0
Stockholders’ equity
Capital stock
Class A common stock 100.0 100.0
Class B common stock 99.6 100.0
Treasury stock
Class A common stock 86.6 100.0
Class B common stock 100.0 100.0
Paid-in capital 118.6 100.0
Earnings invested in the business 106.8 100.0
Accumulated other comprehensive income 386.4 100.0
Total stockholders’ equity 112.9 100.0
Total liabilities and stockholders’ equity 111.9 100.0

117
Problem 5-3 Continued

c. Vertical Common-Size Analysis

Assets
Material increase in cash and equivalents
Material decrease in trade accounts receivable, less allowances
Material increase in noncurrent deferred taxes
Material increase in other assets

Liabilities
Material decrease in accrued insurance
Material increase in accrued retirement benefits
Material increase in other long-term liabilities

Stockholders’ Equity
Material decrease in treasury stock,
Class A common stock
Material increase in accumulated other comprehensive income

Horizontal Common-Size Analysis

Assets
Very material increase in cash and equivalents
Material decrease in deferred taxes
Very material increase in noncurrent deferred taxes
Very material increase in other assets

Liabilities
Material increase in short-term borrowings, accounts payable, income and other
taxes, and accrued retirement benefits
Very material increase in other long-term liabilities
Very material decrease in accrued insurance

Stockholders’ Equity
Material increase in paid-in capital
Very material increase in accumulated other comprehensive income
Material decrease in treasury stock, Class A common stock

118
PROBLEM 5-4

a.
Kelly Services, Inc. and Subsidiaries
Statement of Earnings
For the three fiscal years ended December 31, 2006
Vertical Common-Size Analysis*

2006 2005 2004

Revenue from services 100.0 100.0 100.0
Cost of services 83.5 83.8 84.0
Gross Profit 16.5 16.2 16.0
Selling, general, and administrative expenses 15.1 15.2 15.4
Earnings from operations 1.4 1.0 .6
Other income (expense), net .0 .0 .0
Earnings from continuing operations before taxes 1.4 1.0 .6
Income taxes .4 .3 .2
Earnings from continuing operations 1.0 .7 .4
Earnings from discontinued operations, net of tax .1 .0 .0
Net earnings 1.1 .7 .4

*Some rounding differences

119
Problem 5-4 Continued

b.
Kelly Services, Inc. and Subsidiaries
Statement of Earnings
For the three fiscal years ended December 31, 2006
Horizontal Common-Size Analysis

2006 2005 2004

Revenues from services 113.6 106.5 100.0
Cost of services 113.0 106.3 100.0
Gross Profit 117.2 107.6 100.0
Selling, general, and administrative expense 111.6 105.2 100.0
Earnings from operations 254.0 164.8 100.0
Other income (expense), net N/A 21.7 100.0
Earnings from continuing operations before taxes 266.1 168.9 100.0
Income taxes 214.4 137.4 100.0
Earnings from continuing operations 294.7 186.3 100.0
Earnings from discontinued operations, net of tax 351.3 171.3 100.0
Net earnings 299.3 185.1 100.0

120
Problem 5-4 Continued

c. Vertical Common-Size Analysis

Earnings from operations increased materially. This carried over to earnings from
continuing operations before taxes, earnings from continuing operations, net
earnings, and income taxes

Horizontal Common-Size Analysis

Material increases in revenue from services, cost of services, gross profit, selling,
general and administrative expenses, and income taxes

Very material increase in earnings from operations, earnings from continuing

operations before taxes, earnings from continuing operations, earnings from
discontinued operations, net of tax, and net earnings

121
PROBLEM 5-5

Change Analysis
Item Year 1 Year 2 Amount Percent
1 ----- 3,000 3,000 -----
2 6,000 (4,000) (10,000) -----
3 (7,000) 4,000 11,000 -----
4 4,000 ----- (4,000) (100)
5 8,000 10,000 2,000 25

PROBLEM 5-6

Change Analysis
Item Year 1 Year 2 Amount Percent
1 4,000 ----- (4,000) (100)
2 5,000 (3,000) (8,000) -----
3 (9,000) 2,000 11,000 -----
4 7,000 ----- (7,000) (100)
5 ----- 15,000 15,000 -----

122
PROBLEM 5-7

a.
Increa (Decreas
December 31, se e)
2008 2007 Dollar
s Percent
Net sales $28,00
$30,000 0 $2,000 107.1
Cost of goods sold 20,000 19,500 500 102.6
Gross profit 10,000 8,500 1,500 117.7
Selling, general, and
administrative expense 3,000 2,900 100 103.5
Operating income 7,000 5,600 1,400 125.0
Interest expense 100 80 20 125.0
Income before taxes 6,900 5,520 1,380 125.0
Income tax expense 2,000 1,600 400 125.0
Net income 4,900 3,920 980 125.0

b. Net Sales increased substantially more than Cost of Goods Sold.

Net Sales increased substantially more than Selling, General, and Administrative
Expense.

Interest Expense, Income Tax Expense, and Net Income increased materially
faster than Net Sales.

123
PROBLEM 5-8

a. 5 Most ratios are computed comparing selected income statement and

balance sheet numbers.

b. 1 A figure from the year’s statement is compared with a base selected from
the current year. This would be described as a vertical common-size
statement.

c. 3 Since we do not know the resources employed, Fremont Electronics could

be more profitable than Columbus Electronics in relation to resources
employed.

d. 5 The fact that financial services may be private independent firms does not
relate to industry ratios being considered as absolute norms for a given
industry.

e. 5 The Department of Commerce Financial Report is a publication of the

federal government for manufacturing, mining, and trade corporations.

f. 3 The Almanac of Business and Industrial Financial Ratios represents a

compilation of corporate tax return data.

g. 4 Industry Norms and Key Business Ratios, desktop edition, includes over
800 different lines of business.

h. 2 A horizontal analysis compares each amount with its base amount for a
selected base year.

i. 1 Relative numbers would be most meaningful for comparing two firms in

the coal industry.

j. 1 The statement “management is not interested in the view of investors”

does not represent a fair statement as to the management perspective.

124
THOMSON ONE

1. This Thomson One exercise provides for a review of common-size balance sheet
and income statement of the Merck & Company.

2. This Thomson One exercise provides for a review of common-size balance sheet
and income statement for Anheuser-Busch and Coors Brewing Company.

125