Answer:
Horizontal analysis involves comparing financial statement items of one period to the same items in a prior period. The purpose is to identify changes and trends in financial performance over time.
To perform horizontal analysis for 2022 using 2021 as a base year, we need to calculate the dollar and percentage change in each line item of the income statement from 2021 to 2022.
Horizontal Analysis (2021 as base year):
12/31/2022 12/31/2021 $ Change % Change
Net sales 3,375,000.00 2,700,000.00 675,000.00 25%
Cost of Goods sold 2,092,500.00 1,755,000.00 337,500.00 19%
Selling expense 540,000.00 324,000.00 216,000.00 67%
Administrative expense 270,000.00 243,000.00 27,000.00 11%
Interest expense 148,500.00 108,000.00 40,500.00 38%
Net Income 324,000.00 270,000.00 54,000.00 20%
The horizontal analysis shows that net sales increased by 25%, while cost of goods sold increased by 19% from 2021 to 2022. Selling expense increased significantly by 67%, while administrative expense increased by 11%. Interest expense increased by 38%. The net income increased by 20%.
Vertical analysis is the process of analyzing financial statement items as a percentage of a base figure. The base figure is usually net sales for the income statement.
Vertical Analysis (2022):
12/31/2022 % of Net Sales
Net sales 3,375,000.00 100.00%
Cost of Goods sold 2,092,500.00 62.15%
Gross Profit 1,282,500.00 37.85%
Selling expense 540,000.00 16.00%
Administrative expense 270,000.00 8.00%
Operating Profit 472,500.00 13.99%
Interest expense 148,500.00 4.40%
Net Income 324,000.00 9.60%
Vertical Analysis (2021):
12/31/2021 % of Net Sales
Net sales 2,700,000.00 100.00%
Cost of Goods sold 1,755,000.00 65.00%
Gross Profit 945,000.00 35.00%
Selling expense 324,000.00 12.00%
Administrative expense 243,000.00 9.00%
Operating Profit 378,000.00 14.00%
Interest expense 108,000.00 4.00%
Net Income 270,000.00 10.00%
The vertical analysis shows that in 2022, cost of goods sold represents 62.15% of net sales, while gross profit is 37.85%. Selling expense and administrative expense represent 16.00% and 8.00% of net sales, respectively. Operating profit represents 13.99% of net sales, while interest expense and net income represent 4.40% and 9.60% of net sales, respectively.
In 2021, cost of goods sold represented 65.00% of net sales, while gross profit was 35.00%. Selling expense and administrative expense represented 12.00% and 9.00% of net sales, respectively. Operating profit represented 14.00% of net sales, while interest expense and net
Step-by-step explanation:
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