Discuss significant changes that have occurred in the vertical analysis and hori
ID: 2467030 • Letter: D
Question
Discuss significant changes that have occurred in the vertical analysis and horizontal analysis.
Following are the analysis completed:
Balance Sheet Vertical Analysis Balance Sheet Vertical Analysis Horizontal Analysis Last day year 1 Last day year 1 Last day year 2 Last day year 2 last day years 1 & 2 Assets Current Assets: Cash $ 45,750.00 71.43% $ 64,255.00 85.16% 140.45% Accounts Receivable $ 2,000.00 3.12% $ - 0.00% 0.00% Inventory $ 700.00 1.09% $ 100.00 0.13% 14.29% Supplies $ 5,000.00 7.81% $ 4,000.00 5.30% 80.00% Prepaid Rent $ 6,100.00 9.52% $ 3,100.00 4.11% 50.82% Total Current Assets $ 59,550 92.97% $ 71,455 94.70% PP&E: 0.00% 0.00% Equipment $ 5,000.00 7.81% $ 5,000.00 6.63% 100.00% Accumulated Depreciation $ (500.00) -0.78% $ (1,000.00) -1.33% 200.00% Total PP&E $ 4,500 7.03% $ 4,000 5.30% 88.89% Total Assets $ 64,050 100.00% $ 75,455 100.00% 117.81% Liabilities Current Liabilities: Accounts Payable $ 4,500.00 7.03% $ 8,000.00 10.60% 177.78% Interest Payable $ 100.00 0.16% $ 100.00 0.13% 100.00% Income Taxes Payable $ 545.00 0.85% $ 845.00 1.12% 155.05% Total Current Liabilities $ 5,145 8.03% $ 8,945 11.85% 173.86% LTD: 0.00% 0.00% Notes Payable $ 2,000 3.12% $ 2,000 2.65% 100.00% Total Liabilities $ 7,145 11.16% $ 10,945 14.51% 153.18% Owners' Equity 0.00% 0.00% Stock $ 55,000 85.87% $ 55,000.00 72.89% 100.00% Retained Earnings $ 1,905 2.97% $ 9,510.00 12.60% 499.21% Total Owners' Equity $ 56,905 88.84% $ 64,510 85.49% 113.36% Total Liabilities & Owners' Equity $ 64,050 100.00% $ 75,455 100.00% 117.81%Explanation / Answer
Vertical Analysis:
The vertical analysis shows that the liquidity of the company has been increases significantly as a percentage of total assets (cash has been increased from 75.43% at the end of the year 1 to 85.16% as a percentage of total assets in the last day of year 2.). The liquidity has been increased because of the improvement in cash collection from customers, and because of the improvement of inventory turnover ratio (the inventory and the accounts receivable percentage has been decreased significantly at the end of the year 2 in comparison to the end of the year 1 as reflected by the vertical analysis).
The increase in the liquidity was also supported by the increase in accounts payable, income tax payable and interest payable by the firm in the year 2.
However, the total liability has been increased to 14.51% of the total liabilities and equity at the end of year 2 in comparison to 11.16% at the end of the year 1. This is mainly because of the increase in current liability form 8.03% at the end of the year 1 to 11.85% at the end of the year 2.
The most remarkable change is in retained earnings as the percentage of retained earnings (as a percentage of total liabilities and equity) has been increased to 12.6% in year 2 from just 2.97% in year 1. This indicated the company has recorded a good financial performance in the year 2 with respect to year 1.
The vertical analysis shows that in both the year cash is the main asset in the total asset of the company thereby signifying that the company has perhaps a large amount on unutilized cash in both the years. Whereas, the equities in both the years are almost 88.84% and 85.49% of the total liabilities and equity of the company. This signifies, the gearing ratio of the company is very low and consequently its financial risk.
Horizontal analysis supports the findings from the vertical analysis. On a year to year basis the cash has been increases by 140% in year 2, whereas the other current assets have been significantly decreased in comparison to year1. On the other hand the almost all the liabilities except the notes payable and common stock, have been increased in year 2 in comparison to year 1.
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