The Mathematics of Money

494 Chapter 12 Financial Statements

Horizontal Analysis: A horizontal analysis sets up the two periods side by side and calculates

the change both as an amount and as a percent. For example, the change in sales was

$196,235 
 $176,350  $19,885 as an amount. As a percent change, we take $19,885

and divide it by the 2006 amount of $176,350 to get 11.28%. We do the same for the other

categories. The result is:

Cattarauqua Ginseng Enterprises

2007 Income Statement

Increase (Decrease)

2007 2006 Amount Percent

Sales $196,235 $176,530 $19,705 11.16%


Cost of goods sold $78,090 $62,500 $15,590 24.94%

Gross profi t $118,145 $114,030 $4,015 3.52%


Expenses $59,677 $78,595 ($18,918) (24.07%)

Net income $58,468 $35,435 $23,033 65.00%

Of course, there is more to an income statement than just correctly calculating the values

that go into it. From the vertical analysis, we can see that this company enjoys quite good

profitability as a percent of sales, and that in 2007 profits came in at nearly 30% of sales.

From the horizontal analysis, we can see that sales increased from 2006 to 2007, but that

the cost of goods sold increased at an even faster pace. While this might be cause for con-

cern, we can also see that the company enjoyed a large drop in expenses, enabling them to

experience a huge percent increase in overall profits.

Example 12.1.8 From the trends seen in the horizontal analysis above, can we

make any predictions about Cattarauqua Ginseng Enterprises’ profi tability next year?

The company’s large increase in profi ts was due to a huge decrease in expenses, even in the

face of an increase in the cost of goods sold. While we cannot tell from the income statement

what caused such a large drop in expenses, it is probably unlikely that the company will see

a similar decrease next year. It is unlikely then that the company’s profi ts will be able to grow

by the same percent next year. In fact, if the company continues to experience wholesale cost

increases that outpace increases in their sales, their profi ts may well decline.

A. Basic Income Statements

1. A company has net sales totaling $91,585. The cost of goods sold is $58,535 and the expenses are $27,650. What
   was the company’s net income?


2. Thomas Hydrometer Sales had 2007 gross profi t totaling $74,438,275 and expenses of $69,657,424. What was the
   company’s net income?


3. Calculate the missing values in the income statement below:

Sales $256,529


Cost of goods sold $208,625

Gross profi t (a)


Expenses $84,623

Net income (b)

EXERCISES 12.1