# Vertical Analysis Of Financial Statements

Vertical Analysis Of Financial Statements – Now that you know how to prepare financial statements, let’s see how they can be used to help owners, managers, investors, and creditors evaluate a company’s performance and strength. of the fund. You can gather a lot of information from financial statements, but first you need to learn some basic principles to “open.”

Fast forward again and let’s say your business – The College Store – has just completed its second year of operations. After creating the income statement for the second year, I decided to compare the numbers from that statement with those from the first statement. Then you prepare the comparative income statement in Figure 12.19 “Comparative Income Statement for a Store,” which shows the income figures for Year 2 and Year 1 (accountants normally write the figures for the number closest to the inner column).

## Vertical Analysis Of Financial Statements

What does this story tell you about your second year at work? Some things look good, some don’t. Your sales went from \$500,000 to \$600,000 (20 percent increase – not bad). But your profit has dropped – from \$30k to \$18k (bad sign). As you look at the story, you ask yourself the question: Why are my profits down even though my sales are up? Is this product reasonable? Is there a way to compare the two income statements that will give me a better idea of ​​my company’s financial health? One method is called vertical percentage analysis. It is useful because it shows the relationship of each item on the income statement to a specific base – sales in general – by showing each item as a percentage of that base.

### The Common Size Analysis Of Financial Statements

Figure 12.20 “Comparative Income Statement Using Vertical Percentage Analysis” shows what comparative income data looks like when using a vertical percentage analysis that shows each item as a percentage of sales. Let’s see if this helps clear things up. What do you think is the reason for the company’s declining revenue despite the high sales of The College Shop?

Percentages help you analyze changes in income statement items over time, but it’s easier if you think of percentages as pennies. In the first year, for example, for every \$1.00 in sales, \$0.55 went to paying for the items you bought, leaving \$0.45 for other costs and profit. Operating expenses (wages, rent, advertising, etc.) increased \$0.35 of every \$1.00 of sales, while interest and taxes increased \$0.02 each. After your full payment, your profit is \$0.06 for every \$1.00 of sales.

. Instead of using \$0.55 of every \$1.00 in sales to buy the items you bought, you used \$0.64. As a result, it costs \$0.09 less (\$0.64 – \$0.55) to cover additional costs. This is the main reason why you won’t be as profitable in the second year as you were in the first:

The second year is less than the first year. And while this information may not give you all the answers you need, it does raise some good questions. Why is the relationship between them different?

#### The Four Core Financial Statements

? Do you have to pay more to buy goods for resale, and if so, were you unable to increase the selling price to cover the additional cost? Did I cut costs to move items that didn’t sell well? (If your prices stay the same but your sales price goes down, you’ll earn less per item sold.) The answers to these questions are a little more analytical, but at least you’ll know what the useful.

Vertical percentage analysis helps you analyze the relationships between items on your income statement. But how do your financial results compare to other companies in your industry or industry at large? And what about your balance sheet? Are there any links in this story that are worth checking out as well? Do you need to check the correlation between the items on your income statement and the items on your balance sheet? These issues can be explored using ratio analysis, which is a method of evaluating a company’s financial performance.

Just one number divided by another, and the result shows the relationship of the two numbers. For example, you want to know the relationship between the cost of going to the movies and the cost of renting a DVD. You can do the following calculation:

Ratio analysis is also used to evaluate a company’s performance over time and to compare the same company to similar companies or to the broader industry in which it operates. You can’t learn much from just one ratio, or from multiple generations covering the same period. However, the value of ratio analysis is observation

#### How Financial Statement Analysis Helps Business Grow

Ratios over time and compare ratios over several periods to those of competitors and the industry as a whole. There are many different ways to categorize financial ratios. Here is one of the sections:

Using each of these categories, we can find many different ratios, but we will focus on a few examples.

Of each item on the College Store’s income statement. We were checking the gross product and we found this

And in the second year, it drops to 36 percent. We can show the same relationships in the categories:

## Financial Statements 101

We can see that the tax revenue has decreased (a situation, as we learned earlier, that may not be good). But how do you know if the second-year tax return is right for your company? For one thing, we can use it to compare the results of the College Store with those of its industry. When we compare, we see that the independent retail industry (where your company operates) has an average gross margin of 41 percent. For the first year, the recession was greater than the industry; In year two, even though the percentage is down, we’re still in the proverbial ballpark.

It’s a good idea to keep a large margin, both for your company and for companies you can invest in or borrow money from. In particular, you will gain some knowledge about

It may go out of business. For example, what if you discover that the company’s profit margin has decreased? Is it because the company costs more to sell or manufacture its products, or because competition forces its prices down?

, including the costs of selling or manufacturing its products, managing its operations, and paying interest and taxes. Refer again to Exhibit 12.20 “Comparative Income Statement Using Vertical Percentage Analysis”. Analyzing the vertical percentage, we found that for the College Store, net profit as a percentage of sales was 6 percent in year 1 but dropped to 3 percent in year 2. It is considered a ratio, these relationships look like this:

### Analysis And Interpretation Of Financial …

You know a low net profit margin isn’t great, but you’re wondering how it compares to your business. A little research will tell you that the average profit margin in the industry is 7 percent. You performed with industry in Year 1 but fell behind your level in Year 2. What does this information tell you? The goal of the third year is to try to increase the profit margin.

These ratios show how well the assets (on the balance sheet) are used to generate income (as reported on the income statement). To calculate this set of ratios, you need to look at two statements. In Figure 12.19 “Comparative Income Statement for College Store,” we have produced a comparative income statement for the first two years of College Store. Figure 12.21 “College Standard Balance Sheet” is a comparison sheet for the same period.

As you can see from Figure 12.21 “University Business Balance Sheet,” running a small business requires a significant investment in assets. Even if you’re renting space, for example, you still need to buy furniture and appliances. To be profitable in sales, you have to tie up the money in the inventory. Once sold, money may be tied up in accounts receivable while you wait for the seller to pay you. Therefore, investing in assets is a normal part of doing business. Managing your assets well is an important requirement for a successful business. Let’s look at the good ratio of face management. The inventory turnover ratio measures a company’s ability to sell its inventory.

You will not earn money on unsold items. You can make money selling books, and the faster you sell, the more money you make. To determine how quickly your book is “turning over,” you need to examine the relationship between sales and inventory.

## Solved] I Am Conducting A Report On Chipotle Mexi

For the first year, the College Store turns over its inventory 6.25 sales times: On average, your inventory is sold and replaced 6.25 times a year. For the second year in a row, listings traded at 5.45 times sales. The industry improved, with 6.58 times of retail sales. Before discussing the possible reasons for the College Store’s low turnover ratio, let’s look at another way to describe this ratio. Just turn around

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