Perform Horizontal And Vertical Analysis
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CPA Business Analysis and Reporting (BAR) › Perform Horizontal And Vertical Analysis
An issuer media company reports the following balance sheet amounts (in $000) at December 31: Total liabilities 20X4 $180,000 and 20X5 $210,000; Total equity 20X4 $220,000 and 20X5 $230,000. Using horizontal analysis and the debt-to-equity ratio, what does the analysis suggest about leverage from 20X4 to 20X5?
Leverage was unchanged because both liabilities and equity increased.
Leverage decreased because debt-to-equity rose from 0.82 to 0.91.
Leverage increased because debt-to-equity rose from 0.82 to 0.91.
Liquidity improved because debt-to-equity increased, indicating higher current ratio.
Explanation
This question tests horizontal analysis combined with the debt-to-equity ratio to evaluate leverage trends. Key data points show debt-to-equity rising from 0.82 ($180,000 / $220,000) to 0.91 ($210,000 / $230,000), indicating increased leverage. This aligns with techniques by using ratios to interpret changes. Choice B is incorrect as higher ratio means increased leverage; choice C confuses with liquidity; choice D ignores the ratio increase. A decision rule is to compute ratios year-over-year. Monitor for risk when leverage rises.
A nonissuer retailer reports the following balance sheet amounts (in $000) at December 31: Inventory 20X4 $14,000 and 20X5 $10,500; Total assets 20X4 $70,000 and 20X5 $75,000. Using horizontal analysis of inventory, what trend is indicated from 20X4 to 20X5?
Inventory decreased by $3,500, indicating a reduction in inventory levels.
Inventory increased by $3,500, indicating potential overstocking.
Inventory decreased by 7.0% because total assets increased by $5,000.
Inventory is 14.0% of sales in 20X5 based on vertical analysis, indicating improved profitability.
Explanation
This question tests horizontal analysis of inventory to identify trends in asset management. Key data points are inventory decreasing from $14,000 in 20X4 to $10,500 in 20X5, a $3,500 reduction indicating lower levels. This aligns with horizontal analysis by tracking changes for efficiency insights. Choice A is incorrect as it states an increase; choice C miscalculates percentage as -25%; choice D mixes vertical with sales. A decision rule is (current - prior) calculations. Integrate with turnover ratios for context.
A nonissuer healthcare clinic provides the following balance sheet data (in $000) at December 31: Cash 20X4 $2,500 and 20X5 $1,800; Accounts receivable 20X4 $3,000 and 20X5 $4,200; Total current assets 20X4 $6,500 and 20X5 $7,200. Using vertical analysis within each year, which statement best describes the change in current asset composition?
Cash decreased from 38.5% to 25.0% of current assets, while accounts receivable increased from 46.2% to 58.3%.
Cash decreased by 38.5% based on vertical analysis, indicating a decline in profitability.
Cash increased from 25.0% to 38.5% of current assets, while accounts receivable decreased from 58.3% to 46.2%.
Accounts receivable decreased by $1,200 based on horizontal analysis, indicating improved collections.
Explanation
This question tests vertical analysis within current assets to describe composition changes. Key data points show cash declining from 38.5% ($2,500 / $6,500) to 25% ($1,800 / $7,200), while receivables rise from 46.2% to 58.3%. This aligns with vertical analysis by highlighting shifts in liquidity components. Choice B reverses the trends; choice C misapplies vertical to percentages as changes; choice D uses horizontal incorrectly for a decrease. A decision rule is to express sub-items as percentages of a category total. Monitor for liquidity risks when less liquid assets increase proportionally.
A nonissuer retail company presents the following income statement information for the years ended December 31, 20X4 and 20X5 (in $000): Net sales 20X4 $50,000 and 20X5 $60,000; Cost of goods sold 20X4 $32,500 and 20X5 $40,800; Selling, general, and administrative expenses 20X4 $12,000 and 20X5 $13,800. Using horizontal analysis of net sales, what trend is indicated by the year-over-year comparison?
Net sales increased by 10% from 20X5 to 20X4.
Net sales increased by 20% from 20X4 to 20X5.
Net sales represent 20% of total expenses in 20X5 based on vertical analysis.
Net sales decreased by 20% from 20X4 to 20X5.
Explanation
This question tests horizontal analysis, which examines the percentage change in financial statement items over time to identify trends. The key data points are net sales of $50,000 in 20X4 and $60,000 in 20X5, resulting in a 20% increase calculated as ($60,000 - $50,000) / $50,000. This aligns with horizontal analysis techniques by quantifying year-over-year growth, highlighting positive revenue trends for the retail company. Choice A is incorrect because it states a decrease, which contradicts the calculation showing an increase; choice C is wrong as it reverses the years and miscalculates the percentage; choice D is invalid as it applies vertical analysis to expenses rather than horizontal to sales. A transferable framework for horizontal analysis is to always use the earlier period as the base for percentage change calculations. When interpreting results, consider industry benchmarks to assess if the trend indicates sustainable growth or potential anomalies.
An issuer electronics company reports the following income statement data (in $000): Net sales 20X4 $250,000 and 20X5 $275,000; Cost of goods sold 20X4 $175,000 and 20X5 $198,000. Using horizontal analysis of net sales, what trend is indicated by the year-over-year comparison?
Net sales increased by 10%, indicating steady growth.
Net sales decreased by 10%, indicating contraction.
Net sales increased by 25%, indicating rapid growth.
Net sales represent 10% of cost of goods sold in 20X5 based on vertical analysis.
Explanation
This question tests horizontal analysis of net sales to determine growth trends. Key data points are net sales of $250,000 in 20X4 and $275,000 in 20X5, a 10% increase calculated as ($275,000 - $250,000) / $250,000. This aligns with horizontal analysis by measuring revenue expansion. Choice B is incorrect as it's 10%, not 25%; choice C states a decrease; choice D misapplies vertical to costs. A transferable framework is prior-period base calculations. Benchmark against peers for growth evaluation.
A nonissuer manufacturing company reports the following income statement amounts (in $000). 20X4: Net sales $100,000; Depreciation expense $4,000; Rent expense $6,000. 20X5: Net sales $95,000; Depreciation expense $4,200; Rent expense $6,000. Based on vertical analysis (expenses as a percentage of sales), which statement best describes the change in cost structure?
Rent decreased from 6.3% to 6.0% of sales because depreciation increased.
Depreciation decreased from 4.4% to 4.0% of sales because sales declined.
Sales increased by 5.3% based on vertical analysis, indicating improved profitability.
Depreciation increased from 4.0% to 4.4% of sales, while rent increased from 6.0% to 6.3% of sales.
Explanation
This question tests vertical analysis of expenses as percentages of sales to describe cost changes. Key data points show depreciation rising from 4% ($4,000 / $100,000) to 4.4% ($4,200 / $95,000), and rent from 6% to 6.3% ($6,000 / $95,000). This aligns with vertical analysis by normalizing for sales decline impacts. Choice B reverses depreciation; choice C reverses rent; choice D misuses vertical for sales. A transferable framework is expense-to-sales percentages. Use for detecting cost stickiness in downturns.
An issuer manufacturing company reports the following income statement amounts for the year ended December 31 (in $000). In 20X4: Revenue $120,000; Cost of sales $78,000; Research and development $6,000; Selling, general, and administrative expenses $18,000. In 20X5: Revenue $150,000; Cost of sales $105,000; Research and development $6,000; Selling, general, and administrative expenses $19,500. Based on vertical analysis of the income statement (each line item as a percentage of revenue), how does the cost structure change from 20X4 to 20X5?
Selling, general, and administrative expenses increased as a percentage of revenue, indicating reduced operating leverage.
Cost of sales increased as a percentage of revenue, indicating deteriorating gross margin.
Revenue increased by 25% based on vertical analysis, indicating higher profitability.
Cost of sales decreased as a percentage of revenue, indicating improved gross margin.
Explanation
This question tests vertical analysis, which expresses each income statement item as a percentage of revenue to evaluate cost structure changes. Key data points include cost of sales at 65% of revenue in 20X4 ($78,000 / $120,000) increasing to 70% in 20X5 ($105,000 / $150,000), indicating a higher proportion of revenue consumed by costs. This aligns with vertical analysis by revealing deteriorating gross margins, a critical insight for assessing profitability trends. Choice A is incorrect as cost of sales increased, not decreased, as a percentage; choice B is wrong because SG&A decreased from 15% to 13%; choice D misapplies vertical analysis by confusing it with horizontal percentage change. A decision rule is to compare percentages year-over-year in vertical analysis to detect shifts in cost efficiency. Always integrate vertical with horizontal analysis for a comprehensive view of financial health.
A nonissuer wholesaler provides the following balance sheet data (in $000) at December 31: Current assets 20X4 $18,000 and 20X5 $20,000; Current liabilities 20X4 $12,000 and 20X5 $16,000; Total liabilities 20X4 $20,000 and 20X5 $26,000. Using horizontal analysis and the current ratio, what does the analysis suggest about the company’s short-term financial health from 20X4 to 20X5?
Liquidity improved because the current ratio increased from 1.50 to 1.25.
Profitability deteriorated because total liabilities increased, reducing gross margin.
Liquidity deteriorated because the current ratio declined from 1.50 to 1.25.
Liquidity improved because current assets increased by $2,000 regardless of the change in current liabilities.
Explanation
This question tests horizontal analysis combined with the current ratio to evaluate short-term financial health trends. Key data points show the current ratio declining from 1.50 ($18,000 / $12,000) in 20X4 to 1.25 ($20,000 / $16,000) in 20X5, indicating deteriorating liquidity. This aligns with analysis techniques by using ratios to interpret horizontal changes in assets and liabilities. Choice A is incorrect as it states an improvement despite the decline; choice C confuses liquidity with profitability; choice D ignores the larger increase in liabilities. A decision rule is to compute ratios like current ratio alongside horizontal changes for liquidity assessment. Monitor trends where liability growth outpaces assets to anticipate cash flow issues.
An issuer apparel company reports the following income statement amounts (in $000) for the years ended December 31: Net sales 20X4 $500,000 and 20X5 $520,000; Store operating expenses 20X4 $90,000 and 20X5 $104,000; Corporate overhead 20X4 $40,000 and 20X5 $41,600. Based on comparative analysis of operating expenses as a percentage of sales, which area shows the most significant change?
Total operating expenses decreased as a percentage of sales because net sales increased by 4%.
Store operating expenses increased from 18.0% to 20.0% of sales, representing the most significant change.
Store operating expenses decreased by 2.0% of sales based on horizontal analysis of net sales.
Corporate overhead decreased from 8.0% to 6.0% of sales, representing the most significant change.
Explanation
This question tests comparative vertical analysis of expenses as percentages of sales to find the most significant change. Key data points show store operating expenses rising from 18% ($90,000 / $500,000) to 20% ($104,000 / $520,000) in 20X5, the most notable shift. This aligns with vertical analysis by revealing cost pressures relative to sales. Choice B is incorrect as corporate overhead stayed at 8%; choice C overlooks the percentage increase; choice D confuses analyses. A transferable framework is to compute expense percentages of sales for comparisons. Prioritize interventions in areas with the largest percentage increases.
A nonissuer manufacturing company reports the following balance sheet amounts (in $000) at December 31: Total debt (short-term plus long-term) 20X4 $25,000 and 20X5 $32,500; Total assets 20X4 $70,000 and 20X5 $75,000. Using horizontal analysis of total debt, what trend is indicated from 20X4 to 20X5?
Total debt decreased by $7,500, indicating reduced leverage.
Total debt increased by $7,500, indicating increased leverage.
Total debt is 43.3% of sales in 20X5 based on vertical analysis, indicating improved profitability.
Total debt increased by 7.1% because total assets increased by $5,000.
Explanation
This question tests horizontal analysis of total debt to assess leverage trends. Key data points are total debt increasing from $25,000 in 20X4 to $32,500 in 20X5, a $7,500 rise indicating increased leverage. This aligns with horizontal analysis by tracking absolute and percentage changes in financing. Choice A is incorrect as it states a decrease; choice C miscalculates the percentage as 30%, not 7.1%; choice D inappropriately mixes vertical analysis with sales. A decision rule is to calculate changes as (current - prior) for trend detection. Integrate with ratios like debt-to-assets for comprehensive leverage analysis.