Vertical analysis, also called common size analysis, is a technique that expresses each item in a...

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Vertical analysis, also called common size analysis, is a technique that expresses each item in a financial statement as a percentage of a total (base) amount within the same financial statement. The base amount commonly used for the statement of financial position is total assets (or total liabilities and shareholders' equity, which equals total assets) because that is the largest amount on that statement. For example, we might say that current assets are 43.8% of total assets (total assets being the base amount). The base amount for the statement of income is usually revenues for a service company and sales for a merchandising company, again, because that is usually the largest amount on that statement. Because of this, we might say that cost of goods sold is 61.0% of sales (sales being the base amount). Vertical analysis is helpful to compare financial data relating to a single company or data relating to one or more companies, especially if one of the companies is much larger or smaller than the others, because vertical analysis expresses all items on a common base of total assets or total revenues (sales). Listed below is a vertical analysis of selected information from the financial statements of five publicly traded Canadian companies: A B C D E Sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold (82.3)% (58.1)% (76.5)% (43.2)% (60.1)% Gross profit 17.7% 41.9% 23.5% 56.8% 39.9% Selling and administrative expenses (1.4)% (19.1)% (17.2)% (10.3)% (31.4)% Research and development -0- (13.6)% -0- -0- -0- Interest (1.4)% -0- (1.4)% (2.3)% -0- Depreciation (5.4)% (6.5)% (2.5)% (26.7)% (2.1)% 0.3% Other (13.7)% 0.3% (1.4)% 3.2% Income (loss) before income tax 9.8% (11.0)% 2.7% 16.1% 9.6% Income tax (2.9)% 5.2% (0.7)% (4.4)% (2.5)% Net income (loss) 6.9% (5.8)% 2.0% 11.7% 7.1% B C D E Cash 37.6% 20.2% 10.0% 0.1% 37.9% Accounts receivable 1.0% 24.5% 15.4% 2.4% 5.2% Inventory 1.0% 4.6% 11.2% 1.1% 14.7% Other current assets 4.1% 4.7% 0.6% 0.3% 0.8% Total current assets 43.7% 54.0% 37.2% 3.9% 58.6% Property, plant, and equipment 53.0% 18.2% 50.5% 95.2% 38.7% Intangible assets 1.3% 26.2% 5.9% -0- 2.5% Other non-current assets 2.0% 1.6% 6.4% 0.9% 0.2% Total assets 100.0% 100.0% 100.0% 100.0% 100.0% Current liabilities 31.7% 26.2% 30.0% 8.1% 19.8% Non-current liabilities 29.0% 2.0% 34.2% 42.3% 3.0% Sharcholders' equity 39.3% 71.8% 35.8% 49.6% 77.2% Total liabilities and shareholders' equity 100.0% 100.0% 100.0% 100.0% 100.0% One of the companies included in the vertical analysis above operates a chain of grocery stores and has its own private label. The other four companies are a furniture retailer that has operated for over 100 years, an oil and gas producer with facilities in the oil sands in a year when oil prices were high, a discount airline, and a developer of high-tech communications equipment that does not sell its products directly to consumers. Instructions (1) By analyzing the relationships between the amounts shown, match the descriptions of the companies provided to the applicable company (A through E) shown above. Please explain your reasons. Vertical analysis, also called common size analysis, is a technique that expresses each item in a financial statement as a percentage of a total (base) amount within the same financial statement. The base amount commonly used for the statement of financial position is total assets (or total liabilities and shareholders' equity, which equals total assets) because that is the largest amount on that statement. For example, we might say that current assets are 43.8% of total assets (total assets being the base amount). The base amount for the statement of income is usually revenues for a service company and sales for a merchandising company, again, because that is usually the largest amount on that statement. Because of this, we might say that cost of goods sold is 61.0% of sales (sales being the base amount). Vertical analysis is helpful to compare financial data relating to a single company or data relating to one or more companies, especially if one of the companies is much larger or smaller than the others, because vertical analysis expresses all items on a common base of total assets or total revenues (sales). Listed below is a vertical analysis of selected information from the financial statements of five publicly traded Canadian companies: A B C D E Sales 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold (82.3)% (58.1)% (76.5)% (43.2)% (60.1)% Gross profit 17.7% 41.9% 23.5% 56.8% 39.9% Selling and administrative expenses (1.4)% (19.1)% (17.2)% (10.3)% (31.4)% Research and development -0- (13.6)% -0- -0- -0- Interest (1.4)% -0- (1.4)% (2.3)% -0- Depreciation (5.4)% (6.5)% (2.5)% (26.7)% (2.1)% 0.3% Other (13.7)% 0.3% (1.4)% 3.2% Income (loss) before income tax 9.8% (11.0)% 2.7% 16.1% 9.6% Income tax (2.9)% 5.2% (0.7)% (4.4)% (2.5)% Net income (loss) 6.9% (5.8)% 2.0% 11.7% 7.1% B C D E Cash 37.6% 20.2% 10.0% 0.1% 37.9% Accounts receivable 1.0% 24.5% 15.4% 2.4% 5.2% Inventory 1.0% 4.6% 11.2% 1.1% 14.7% Other current assets 4.1% 4.7% 0.6% 0.3% 0.8% Total current assets 43.7% 54.0% 37.2% 3.9% 58.6% Property, plant, and equipment 53.0% 18.2% 50.5% 95.2% 38.7% Intangible assets 1.3% 26.2% 5.9% -0- 2.5% Other non-current assets 2.0% 1.6% 6.4% 0.9% 0.2% Total assets 100.0% 100.0% 100.0% 100.0% 100.0% Current liabilities 31.7% 26.2% 30.0% 8.1% 19.8% Non-current liabilities 29.0% 2.0% 34.2% 42.3% 3.0% Sharcholders' equity 39.3% 71.8% 35.8% 49.6% 77.2% Total liabilities and shareholders' equity 100.0% 100.0% 100.0% 100.0% 100.0% One of the companies included in the vertical analysis above operates a chain of grocery stores and has its own private label. The other four companies are a furniture retailer that has operated for over 100 years, an oil and gas producer with facilities in the oil sands in a year when oil prices were high, a discount airline, and a developer of high-tech communications equipment that does not sell its products directly to consumers. Instructions (1) By analyzing the relationships between the amounts shown, match the descriptions of the companies provided to the applicable company (A through E) shown above. Please explain your reasons.

Answer rating: 100% (QA)

Answer B Developer of high tech communications equipment Because it is the only company with RD E... View the full answer