Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 14 Financial Statement Analysis 671

Instructions

1. Prepare a comparative income statement with horizontal analysis for the two-year period,
   using 2007 as the base year. Round to two decimal places.


2. To the extent the data permit, comment on the significant relationships revealed by the hor-
   izontal analysis prepared in (1).

For 2008, Audio Tone Company initiated a sales promotion campaign that included the expen-

diture of an additional $13,800 for advertising. At the end of the year, Gordon Kincaid, the pres-

ident, is presented with the following condensed comparative income statement:

Instructions

1. Prepare a comparative income statement for the two-year period, presenting an analysis
   of each item in relationship to net sales for each of the years. Round to two decimal places.


2. To the extent the data permit, comment on the significant relationships revealed by the ver-
   tical analysis prepared in (1).

Data pertaining to the current position of Anderson Lumber Company are as follows:

Cash $240,000

Marketable securities 110,000

Accounts and notes receivable (net) 380,000

Inventories 495,000

Prepaid expenses 30,000

Accounts payable 390,000

Notes payable (short-term) 150,000

Accrued expenses 50,000

Instructions

1. Compute (a) the working capital, (b) the current ratio, and (c) the quick ratio. Round to two
   decimal places.


2. List the following captions on a sheet of paper:

Transaction Working Capital Current Ratio Quick Ratio

Problem 14-2A

Vertical analysis for income
statement

Goal 1

1. Net income, 2008, 21.20%

Problem 14-3A

Effect of transactions on
current position analysis

Goal 4

1. Current ratio, 2.13

Audio Tone Company

Comparative Income Statement

For the Years Ended December 31, 2008 and 2007

2008 2007

Sales $664,000 $526,000

Sales returns and allowances 4,000 6,000

Net sales $660,000 $520,000

Cost of goods sold 257,400 213,200

Gross profit $402,600 $306,800

Selling expenses $138,600 $124,800

Administrative expenses 72,600 67,600

Total operating expenses $211,200 $192,400

Income from operations $191,400 $114,400

Other income 2,500 2,000

Income before income tax $193,900 $116,400

Income tax expense 54,000 30,000

Net income $139,900 $ 86,400