Horizontal and vertical analysis of the income statement for a retail company selling women?s clothing is shown below.

Instructions

a. How effectively has the company controlled its cost of goods sold and operating expenses over the four-year period?

b. Identify any other income statement components that have significantly changed over the four-year period for the company.

c. Identify any additional information that might be helpful to you in your analysis of this company over the four-year period.

Taking It Further

Explain how a horizontal analysis is affected if an account (a) has no value in a base year and a value in the next year, or (b) has a negative value in the base year and a positive value in the next year.

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TARA CORPORATION Horizontal Income Statement Year Ended January 31 2021 2020 2019 2018 Net sales 140.0% 111.0% 114.0% 100.0% Cost of goods sold Gross profit Operating expenses Profit from operations Other revenues and expenses Interest expense 148.3% 113.3% 116.7% 100.0% 127.5% 107.5% 110.0% 100.0% 171.4% 133.1% 126.9% 100.0% 93.3% 87.6% 96.9% 100.0% 40.0% 60.0% 80.0% 100.0% Other revenue 240.0% 140.0% 200.0% 100.0% Profit before income tax 140.0% 110.8% 113.8% 100.0% Income tax expense Profit 160.0% 116.0% 124.0% 100.0% 135.2% 109.5% 111.4% 100.0% TARA CORPORATION Vertical Income Statement Year Ended January 31 2021 2020 2019 2018 Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 63.6% 61.2% 61.4% 60.0% Gross profit Operating expenses Profit from operations Other revenues and expenses 36.4% 38.8% 38.6% 40.0% 21.4% 21.0% 19.5% 17.5% 15.0% 17.8% 19.1% 22.5% (2.9)% (5.4)% (7.0)% (10.0)% Interest expense Other revenue 0.9% 0.6% 0.9% 0.5% Profit before income tax 13.0% 13.0% 13.0% 13.0% Income tax expense 2.9% 2.6% 2.7% 2.5% Profit 10.1% 10.4% 10.3% 10.5%