| Vertical Analysis of Income Statement |
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| Horizontal Analysis of Income Statement |
| All items are presented as a % of Net Sales |
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| All items are presented as a % of Net Sales |
| Notice the vertical analysis is analyzin one year only |
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| Notice the horizontal analysis is analyzing the change between two years |
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| 20X2 |
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| What does this mean? |
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| 20X2 |
20X1 |
% Change from 20X1 to 20X2 |
What does this mean?
From 20X1 to 20X2: |
| Sales |
$1,300,000 |
| 100.0% |
Sales or Net Sales is the denominator for all accounts below in a Vertical Analysis. |
| Sales |
$1,300,000 |
$1,000,000 |
30% |
Sales increased 30% from 20X1 to 20X2. The formula is (20X2 Sales - 20X1 Sales) divided by 20X1 Sales. I memorize the formula like this: (New - Old)/Old |
| Cost of Goods Sold |
600,000 |
| 46.2% |
Divide cell B6 by $B$5. The formula is: =SUM(B6/$B$5) |
| Cost of Goods Sold |
600,000 |
400,000 |
50% |
COGS increased 50%, which is 20% more than net sales. What would cause this to occur? Did vendors increase prices? Was there inventory shrinkage? |
| Gross Profit |
| 700,000 |
53.8% |
Gross profit is ~ 54% of Net Sales |
| Gross Profit |
700,000 |
600,000 |
17% |
Notice you cannot derive Cell J7 by subtracting 50% from 30%. Gross project increased 17%, almost 1/2 of the increase in Net Sales |
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| By using $B$5 instead of B5 as the denominator, you can copy and paste the formula down. The $ sign anchors a specific cell; in this case, B5 Total Sales |
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| Operating Expenses: |
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| Operating Expenses: |
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| General & Administration Expenses |
125,000 |
| 9.6% |
Divide cell B10 by $B$5 |
| General & Administration Expenses |
125,000 |
85,000 |
47% |
Why did G&A expenses increase 47% in one year? |
| Selling Expenses |
100,000 |
| 7.7% |
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| Selling Expenses |
100,000 |
65,000 |
54% |
Why did Selling expenses increase 54%? |
| Total Operating Expenses |
| 225,000 |
17.3% |
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| Total Operating Expenses |
225,000 |
150,000 |
50% |
Notice again, Cell J12 cannot be derived by subtracting J11 from J10. |
| Operating Income |
| 475,000 |
37% |
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| Operating Income |
475,000 |
450,000 |
6% |
Continuing using the formula (New - Old)/Old |
| Interest Expense |
| 10,000 |
0.8% |
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| Interest Expense |
10,000 |
5,000 |
100% |
The company must have borrowed more funds bc interest expense doubled. Why? What was the intent of the borrowing? |
| Income Before Taxes |
| 465,000 |
35.8% |
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| Income Before Taxes |
465,000 |
445,000 |
4% |
| Income Taxes |
| 139,500 |
10.7% |
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Income Taxes |
139,500 |
133,500 |
4% |
Income taxes are an unavoidable expense, but can be managed through effective tax strategies |
| Net Income After Taxes |
| $325,500 |
25.0% |
Net Income is 25% of Net Sales |
| Net Income After Taxes |
$325,500 |
$311,500 |
4% |
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| Since Gross Profit is 53.8% and Net Income is 25% of Net Sales, Operating Expenses, Interest Expense, and Income Tax Expense must be 28.8% of Net Sales (53.8% - 25%) OR (9.6% + 7.7% + .8% + 10.7% = 28.8%) |
Bezam2021
HorizontalandVerticalofIS.xlsx
