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Comparative information taken from the Wells Company financial statements is shown below:
2002 2001
(a) Notes receivable $ 20,000 $ -0-
(b) Accounts receivable 182,000 140,000
(c) Retained earnings 30,000 (40,000)
(d) Income taxes payable 45,000 20,000
(e) Sales 900,000 750,000
(f) Operating expenses 170,000 200,000
Instructions
Using horizontal analysis, show the percentage change from 2001 to 2002 with 2001 as the
base year.
Solution
(a) Base year is zero. Not possible to compute.
(b) $42,000 ÷ $140,000 = 30% increase
(c) Base year is negative. Not possible to compute.
(d) $25,000 ÷ $20,000 = 125% increase
(e) $150,000 ÷ $750,000 = 20% increase
(f) $30,000 ÷ $200,000 = 15% decrease
Cline Corporation had net income of $2,000,000 in 2000. Using 2000 as the base year, net
income decreased by 70% in 2001 and increased by 175% in 2002.
Instructions
Compute the net income reported by Cline Corporation for 2001 and 2002.
Solution
2001: X ÷ $2,000,000 = 70%
X = $2,000,000 × .70 = $1,400,000
The decrease is $1,400,000; therefore net income for 2001 is $600,000.
2002: X ÷ $2,000,000 = 175%
X = $2,000,000 × 1.75
X = $3,500,000
The net income for 2002 is $5,500,000 ($2,000,000 + $3,500,000).
This study source was downloaded by 884789 from cliffsnotes.com on 04-13-2025 18:02:51 GMT -05:00
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The following items were taken from the financial statements of Ritz, Inc., over a four-year
period:
Item 2003 2002 2001 2000
Net Sales $800,000 $650,000 $600,000 $500,000
Cost of Goods Sold 580,000 460,000 420,000 400,000
Gross Profit $220,000 $190,000 $180,000 $100,000
Instructions
Using horizontal analysis and 2000 as the base year, compute the trend percentages for net
sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or
unfavorable for each item.
Solution
Item 2003 2002 2001 2000
Net Sales 160% 130% 120% 100%
Cost of Goods Sold 145% 115% 105% 100%
Gross Profit 220% 190% 180% 100%
The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing
which could be unfavorable, but the sales are increasing each year at a faster pace than cost of
goods sold. This is apparent by examining the gross profit percentages, which show a
favorable, increasing trend.
This study source was downloaded by 884789 from cliffsnotes.com on 04-13-2025 18:02:51 GMT -05:00
4$HJ$M(*$J($(*$*98AMHorizontal_and_Verticle_analysis_Ratio.docx
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Comparative information taken from the Wells Company financial statements is shown below:
2002 2001
(a) Notes receivable $ 20,000 $ -0-
(b) Accounts receivable 182,000 140,000
(c) Retained earnings 30,000 (40,000)
(d) Income taxes payable 45,000 20,000
(e) Sales 900,000 750,000
(f) Operating expenses 170,000 200,000
Instructions
Using horizontal analysis, show the percentage change from 2001 to 2002 with 2001 as the
base year.
Solution
(a) Base year is zero. Not possible to compute.
(b) $42,000 ÷ $140,000 = 30% increase
(c) Base year is negative. Not possible to compute.
(d) $25,000 ÷ $20,000 = 125% increase
(e) $150,000 ÷ $750,000 = 20% increase
(f) $30,000 ÷ $200,000 = 15% decrease
Cline Corporation had net income of $2,000,000 in 2000. Using 2000 as the base year, net
income decreased by 70% in 2001 and increased by 175% in 2002.
Instructions
Compute the net income reported by Cline Corporation for 2001 and 2002.
Solution
2001: X ÷ $2,000,000 = 70%
X = $2,000,000 × .70 = $1,400,000
The decrease is $1,400,000; therefore net income for 2001 is $600,000.
2002: X ÷ $2,000,000 = 175%
X = $2,000,000 × 1.75
X = $3,500,000
The net income for 2002 is $5,500,000 ($2,000,000 + $3,500,000).
This study source was downloaded by 884789 from cliffsnotes.com on 04-13-2025 18:02:51 GMT -05:00
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The following items were taken from the financial statements of Ritz, Inc., over a four-year
period:
Item 2003 2002 2001 2000
Net Sales $800,000 $650,000 $600,000 $500,000
Cost of Goods Sold 580,000 460,000 420,000 400,000
Gross Profit $220,000 $190,000 $180,000 $100,000
Instructions
Using horizontal analysis and 2000 as the base year, compute the trend percentages for net
sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or
unfavorable for each item.
Solution
Item 2003 2002 2001 2000
Net Sales 160% 130% 120% 100%
Cost of Goods Sold 145% 115% 105% 100%
Gross Profit 220% 190% 180% 100%
The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing
which could be unfavorable, but the sales are increasing each year at a faster pace than cost of
goods sold. This is apparent by examining the gross profit percentages, which show a
favorable, increasing trend.
This study source was downloaded by 884789 from cliffsnotes.com on 04-13-2025 18:02:51 GMT -05:00
4$HJ$M(*$J($(*$*98AMHorizontal_and_Verticle_analysis_Ratio.docx
AMHorizontal_and_Verticle_analysis_Ratio.docx
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