Chapter 14 Financial Statement Analysis 633We cannot fully evaluate the significance of the various increases and decreases in
the items shown in Exhibit 1 without additional information. Total assets on January 1,
2005, were approximately $273 million (27.2%) greater than at the beginning of the
year. This increase is largely the result of an increase in investments of $352.5 million
(74.4%). This is mostly due to the operating success of the company, which can be seen
by the 36.0% increase in retained earnings. In addition, stockholders’ equity increased
by 29.7% due to the issuance of additional common stock from exercise of employee
stock options. Overall, the financial position of Pixar has improved over the year.
The remaining changes in the balance sheet accounts in Exhibit 1 appear favorable.
The increase in cash is explained on the statement of cash flows. The accounts receivable
declined 60.0% due to significant collections on amounts owed by Disneyon its film part-
nership. Film inventories grew by 30.0% reflecting the costs incurred for new film proj-
ects.Inventoryin this industry represents the costs associated with Pixar’s film pipeline,
which is classified as noncurrent because it exceeds one year.
Exhibit 2 shows the horizontal analysis for the income statement of Pixar. The last
line of the statement indicates that Pixar had a $16.9 million (13.5%) increase in net in-
come. This is a strong improvement. The rest of the income statement indicates how
Pixar accomplished this. The net sales increased by 4.2%, while the cost of goods sold
decreased by 21.3%, thus causing the gross profit to increase by 8.5%. The general and
administrative expenses increased by 17.2%, while the research and development in-
creased by 13.7%, causing total operating expenses to increase by 14.4%. Interest in-
come increased by 18.1% from the increased investment shown on the balance sheet.
The increase in gross profit and interest income more than offset the increase in oper-
ating expenses, causing net income to increase.Vertical Analysis
A percentage analysis may also be used to show the relationship of each component
to the total within a single statement. This type of analysis is called vertical analysis.
To illustrate, assume that cash of $50,000 and inventories of $250,000 are included in
the total assets of $1,000,000 on a balance sheet. In relative terms, the cash balance is
5% of the total assets, and the inventories are 25% of the total assets.
Like horizontal analysis, the statements may be prepared in either detailed or con-
densed form. In the latter case, additional details of the changes in individual itemsExhibit 2
Comparative Income
Statement—Horizontal
Analysis
Pixar
Income Statement (In millions)
For Periods Ended January 1, 2005, and January 3, 2004Increase (Decrease)
2004 2003 Amount Percent
Total revenue $273.5 $262.5 $11.0 4.2%
Cost of goods sold 29.9 38.0 (8.1) 21.3
Gross profit $243.6 $224.5 $19.1 8.5
Research and development expenses $ 17.4 $ 15.3 $ 2.1 13.7
Sales and marketing expenses 2.5 2.4 0.1 4.2
General and administrative expenses 15.0 12.8 2.2 17.2
Total operating expenses $ 34.9 $ 30.5 $ 4.4 14.4
Income from operations $208.7 $194.0 $14.7 7.6
Interest income and other 12.4 10.5 1.9 18.1
Income before income taxes $221.1 $204.5 $16.6 8.1
Income tax expense 79.4 79.7 (0.3) 0.4
Net income $141.7 $124.8 $16.9 13.5