Chapter 5

Basics of Analysis

QUESTIONS

5 - 1. A ratio is a fraction comparing two numbers. Ratios make the comparisons in

relative, rather than absolute, terms, which helps alleviate the problem of size
difference.

5 - 2. a. Liquidity is the ability to meet current obligations. Short-term creditors

such as banks or suppliers would be particularly interested in these
ratios.

b. Borrowing capacity measures the protection of long-term creditors.

Long-term bond holders would be particularly interested in these ratios.

c. Profitability means earning ability. Investors would be particularly

interested in these ratios.

5 - 3. Comparisons of historical data, industry average, earnings of competitors, etc.

5 - 4. An absolute change would be plus or minus X dollars; a percentage change

would be plus or minus X percent of the base. Percentage changes usually
give better measures because they recognize the difference in the size of the
base.

5 - 5. Horizontal analysis expresses an item in relation to that same item for a

previous base year. This analysis measures change over time.

Example
In 2010, sales were $750,000; in 2009, they were $500,000. Horizontal
analysis shows 2010 sales as 150% of those in 2009.

Vertical analysis compares one item with another base item for that same
year.

Example
In 2010, selling expenses were $75,000 and sales were $750,000. Vertical
analysis would show selling expenses as 10% of 2010 sales.

5 - 6. Trend analysis involves comparing the past to the present. It can be used
both for ratios and absolute figures.

5 - 7. When comparing two firms of different size, relative figures are most
meaningful. These include ratios and common-size analysis. The relative
amounts of sales, assets, profits, or market share help evaluate relative size.

88
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5 - 8. While managers make great use of financial reports, investors, creditors,
employers, suppliers, regulators, auditors, and consumers also use financial
reports.

5 - 9. Managers analyze data to study profitability, evaluate how efficiently they use
their assets to generate revenues, and the overall financial position of the firm.
Investors study profitability and the chance to earn on their investment.
Creditors study the ability of the firm to handle debt.

5 -10. a. Best Buy Co. (Exhibit 5-3)

Current assets is the single-largest asset category. This would be typical

for a retailer. Property and equipment will often be a high category
unless it is held down by leases which limit investment in productive
(capital) assets.

Kelly Services, Inc. (Exhibit 5-4)

Current assets is the single-largest asset category. This would be typical

for a service firm.

Cooper Tire & Rubber Company (Exhibit 5-5)

Current assets is the largest asset category. Property, plant, and

equipment would typically also be high for a manufacturer.

b. Cooper Tire & Rubber Company

We would expect a manufacturing firm to have a large amount in current

assets because of receivables and inventory. We would also expect a
service firm to have a large amount in current assets in relation to current
liabilities because of receivables.

5 -11. A manufacturing firm will have raw materials, work in process, finished
goods, and supplies. A retail firm will only have merchandise inventories.

5 -12. Some types of products must be processed and immediately packaged for
sale. They cannot be held in the processing state. Each night, all raw
materials must be converted to finished goods. Cosmetics, such as nail
polish, would dry up overnight. Foods might spoil. They, therefore, cannot be
left in a semi-finished state.

5 -13. Median 10.5%; upper quartile 13%; lower quartile 9.3%.

5 -14. Reference Book of Corporate Managements

89
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
5 -15. a. 13

b. Manufacturing, construction, transportation, retail trade, banking, and

wholesale trade.

5 -16. a. Yes. The Department of Commerce Financial Reports includes industry

sales. We could relate the sales of the firm in question to the total
industry amount.

b. Yes. The Department of Commercial Financial Report includes total

assets for the total industry. We could relate the total assets of the firm
in question to the total in the industry.

5 -17. a. The SIC is the Standard Industrial Classification. It was developed for
use in the classification of establishments by type of activity in which
they are engaged.

Determining a company's SIC is a good starting point in your search of a

company, industry, or product. Many library sources use the SIC
number as a method of classification. Thus, knowing a company's SIC
will be necessary in order to use some library sources.

b. The North American Industry Classification system (NAICS) was created

jointly by the United States, Canada, and Mexico. NAICS provides
enhanced industry comparability among the three NAFTA trading
partners.

NAIS divides the economy into twenty sectors. Industries within these
sectors are grouped according to the production criterion. Four sectors
are largely goods-producing industries and sixteen sectors are entirely
services-producing industries.

5 -18. Standard & Poor's Register of Corporations, Directors and Executives, Volume
2, Section 5, lists the officer deaths that have been reported to the publisher.

5 -19. Standard & Poor's Analyst's Handbook

5 -20. Value Line Investment Survey

5 -21. The Securities Owner's Stock Guide

5 -22. Sources that contain a dividend record of payments are the following:
1. Mergent dividend record, and
2. Standard & Poor’s Annual Dividend Record

5 -23. Standard & Poor’s Statistical Services

90
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 5 -24. The Standard & Poor's Register of Corporations, Directors and Executives,
Volume 2, contains information on principal business affiliations of officers.

5 -25. 1. Standard & Poor's Industry Survey

2. Value Line Investment Survey

5 -26. Thomas Register of American Manufacturers

PROBLEMS

PROBLEM 5-1

a.
Best Buy Co., Inc.
Consolidated Statements of Earnings
Vertical Common-Size

February 26, February 27, February 28,

For the fiscal years ended 2011 2010 2009
Revenue 100.0 100.0 100.0
Cost of goods sold 74.8 75.5 75.6
Restructuring charges – cost of goods
sold 0.0 ----- -----
Gross profit 25.1 24.5 24.4
Selling, general and administrative
expenses 20.5 19.9 20.0
Restructuring charges 0.4 0.1 0.2
Goodwill and tradename impairment ----- ----- 0.1
Operating income 4.2 4.5 4.2
Other income (expense)
Investment income and other 0.1 0.1 0.1
Investment impairment ----- ----- (0.2)
Interest expense (0.2) (0.2) (0.2)
Earnings before income tax expense, and
equity in income of affiliates
4.1 4.4 3.8
Income tax expense 1.4 1.6 1.5
Equity in income of affiliates 0.0 0.0 0.0
Net earnings including noncontrolling
interests 2.7 2.8 2.3
Net earnings attributable to noncontrolling
interests (0.2) (0.2) (0.0)
Net earnings attributable to Best Buy Co.,
Inc. 2.5 2.7 2.2

91
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Problem 5-1 Concluded

b.
Best Buy Co., Inc.
Consolidated Statements of Earnings
Horizontal Common-Size

February 26, February 27, February 28,

For the fiscal years ended 2011 2010 2009
Revenue 111.7 110.4 100.0
Cost of goods sold 110.6 110.3 100.0
Restructuring charges – cost of goods sold ----- ----- N/A
Gross profit 114.9 110.6 100.0
Selling, general and administrative expenses 114.9 109.9 100.0
Restructuring charges 253.8 66.7 100.0
Goodwill and tradename impairment ----- ----- N/A
Operating income 113.0 119.5 100.0
Operating income (expense)
Investment income and other 145.7 154.3 100.0
Investment impairment ----- ----- 100.0
Interest expense 92.6 100.0 -----
Earnings before income tax expense and
equity income of affiliates 122.2 129.1 100.0
Income tax expense 105.9 119.0 100.0
Equity in income of affiliates 28.6 14.3 100.0
Net earnings including noncontrolling interests 132.2 134.9 100.0
Net earnings attributable to noncontrolling
interests 296.7 256.7 100.0
Net earnings attributable to Best Buy Co., Inc. 127.3 131.3 100.0

c. Vertical Common-Size
Material increases in 2010, then a substantial decrease in 2011.

Material increases in 2010 were in earnings before income tax expense and
equity in income of affiliates; net earnings including noncontrolling interests; and
net earnings attributable to Best Buy Co., Inc.

Horizontal Common-Size
All of the items materially increased or decreased in 2010 except for interest
expense, which increased substantially.

Restructuring charges very materially increased in 2011. This contributed to a

material decrease in income tax expense in 2011.

Equity in income of affiliates materially increased in 2011 as did net earnings

attributable to noncontrolling interests.
92
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
PROBLEM 5-2

a.
Best Buy Co., Inc.
Vertical Common-Size Balance Sheet

In Percentage*
February 26, February 27,
2011 2010
Assets
Current assets
Cash and cash equivalents 6.2 10.0
Short-term investments 0.1 0.5
Receivables 13.2 11.0
Merchandise inventories 33.0 30.0
Other current assets 6.2 6.3
Total current assets 58.7 57.7
Property and equipment
Land and buildings 4.3 4.1
Leasehold improvements 13.0 11.8
Fixtures and equipment 26.3 24.3
Property under capital lease 0.7 0.5
44.3 40.7
Less accumulated depreciation 22.9 18.5
Net property and equipment 21.4 22.2
Goodwill 13.7 13.4
Tradenames, net 0.7 0.9
Customer relationships, net 1.1 1.5
Equity and other investments 1.8 1.8
Other assets 2.4 2.5
Total assets 100.0 100.0

*Some rounding differences

93
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-2a Continued

In Percentage*
February 26, February 27,
2011 2010
Liabilities and equity
Current liabilities
Accounts payable 27.4 28.8
Unredeemed gift card liabilities 2.7 2.5
Accrued compensation and related
expense 3.2 3.0
Accrued liabilities 8.2 9.2
Accrued income taxes 1.4 1.7
Short-term debt 3.1 3.6
Current portion of long-term debt 2.5 0.2
Total current liabilities 48.5 49.1
Long-term liabilities 6.6 6.9
Long-term debt 4.0 6.0
Contingencies and commitments
Equity
Preferred stock ----- -----
Common stock 0.2 0.2
Additional paid-in capital 0.1 2.4
Retained earnings 35.7 31.7
Accumulated other comprehensive income 1.0 0.2
Total Best Buy Co., Inc. shareholders’ equity 37.0 34.5
Noncontrolling interests 3.9 3.5
Total equity 40.9 38.1
Total liabilities and equity 100.0 100.0

* Some rounding differences

94
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-2 Continued

b.
Best Buy Co., Inc.
Horizontal Common-Size Balance Sheet

In Percentage
February 26, February 27,
2011 2010
Assets
Current assets
Cash and cash equivalents 60.5 100.0
Short-term investments 24.4 100.0
Receivables 116.2 100.0
Merchandise inventories 107.5 100.0
Other current assets 96.4 100.0
Total current assets 99.1 100.0
Property and equipment
Land and buildings 101.2 100.0
Leasehold improvements 107.6 100.0
Fixtures and equipment 105.7 100.0
Property under capital lease 126.3 100.0
106.1 100.0
Less accumulated depreciation 120.7 100.0
Net property and equipment 93.9 100.0
Goodwill 100.1 100.0
Tradenames, net 83.6 100.0
Customer relationships, net 72.8 100.0
Equity and other investments 101.2 100.0
Other assets 96.2 100.0
Total assets 97.5 100.0

95
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-2b Concluded

In Percentage
February 26, February 27,
2011 2010
Liabilities and equity
Current liabilities
Accounts payable 92.8 100.0
Unredeemed gift card liabilities 102.4 100.0
Accrued compensation and related
expense 104.8 100.0
Accrued liabilities 87.5 100.0
Accrued income taxes 81.0 100.0
Short-term debt 84.0 100.0
Current portion of long-term debt 1,260.0 100.0
Total current liabilities 96.5 100.0
Long-term liabilities 94.2 100.0
Long-term debt 64.4 100.0
Contingencies and commitments
Equity
Preferred stock ----- -----
Common stock 92.9 100.0
Additional paid-in capital 4.1 100.0
Retained earnings 109.9 100.0
Accumulated other comprehensive
income 432.5 100.0
Total Best Buy Co., Inc. shareholders’
equity 104.5 100.0
Noncontrolling interests 107.1 100.0
Total equity 104.7 100.0
Total liabilities and equity 97.5 100.0

c. Vertical Common-Size
Assets:
No material changes

Liabilities:
No material changes, except decline in long-term debt and increase in
noncontrolling interests.

A substantial increase in total Best Buy Co., Inc. shareholders’ equity and total
equity.

96
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 PROBLEM 5-3

a.
Kelly Services, Inc. and Subsidiaries
Consolidated Statement of Earnings
For the three fiscal years ended December 31, 2010
Vertical Common-Size Analysis*

2010 2009(1) 2008

Revenue from services 100.0 100.0 100.0
Cost of services 84.0 83.7 82.3
Gross Profit 16.0 16.3 17.7
Selling, general, and administrative expenses 15.2 18.4 17.5
Asset impairments 0.0 1.2 1.5
Earnings (loss) from operations 0.8 (3.4) (1.3)
Other expense, net (0.1) (0.0) (0.0)
Earnings (loss) from continuing operations before taxes 0.7 (3.4) (1.3)
Income taxes (0.1) 1.0 (0.1)
Earnings (loss) from continuing operations 0.5 (2.4) (1.5)
Earnings (loss) from discontinued operations, net of tax ----- 0.0 0.0
Net earnings (loss) 0.5 (2.4) (1.5)
(1)
Fiscal year included 53 weeks

*Some rounding differences

97
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-3 Continued

b.
Kelly Services, Inc. and Subsidiaries
Consolidated Statements of Earnings
For the three fiscal years ended December 31, 2010
Horizontal Common-Size Analysis

2010 2009(1) 2008

Revenues from services 89.7 78.2 100.0
Cost of services 91.5 79.6 100.0
Gross Profit 81.3 71.8 100.0
Selling, general, and administrative expense 78.0 82.1 100.0
Asset impairments 2.5 66.0 100.0
Earnings (loss) from operations N/A (207.8) (100.0)
Other expense, net 158.8 64.7 100.0
Earnings (loss) from continuing operations before
taxes N/A (`201.22) (100.0)
Income taxes 82.5 N/A 100.0
Earnings (loss) from continuing operations N/A (128.6) (100.0)
Earnings (loss) from discontinued operations, net of
tax ----- N/A 100.0
Net earnings (loss) N/A (127.1) 100.0
(1)
Fiscal year included 53 weeks

98
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-3 Concluded

c. Vertical Common-Size Analysis

Gross profit decreased materially between 2008 and 2010. This was caused by
the increase in cost of services.

Selling, general and administrative expenses increased moderately in 2009 and

decreased materially in 2010.

Asset impairments decreased materially between 2008 and 2010.

The items described here resulted in a material increase in losses for 2009 and the
minor profit in 2010.

Horizontal Common-Size Analysis

Gross profit decreased materially in 2009 and then increased materially in 2010.

Selling, general and administrative expenses decreased materially in 2009 and

then decreased moderately in 2010.

Asset impairments decreased materially in both 2009 and 2010.

Earnings (loss) from operations materially increased its loss in 2009 and then
turned to a profit in 2010.

Other expense, net decreased materially in 2009 and increased materially in 2010.

Earnings (loss) from continuing operations before taxes materially increased its
loss in 2009 and turned to a profit.

Earnings (loss) from continuing operations materially increased its loss in 2009 and
turned to a profit in 2010.

Net earnings (loss) materially increased its loss in 2009 and turned to a profit in
2010.

99
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
PROBLEM 5-4

a.
Kelly Securities, Inc. and Subsidiaries
Balance Sheets
December 31, 2010 and December 31, 2009
Vertical Common-Size Analysis

In Percentage*
2010 2009
Assets
Current assets
Cash and equivalents 5.9 6.8
Trade accounts receivable 59.3 54.7
Prepaid expenses and other current assets 3.3 5.4
Deferred taxes 1.6 1.6
Total current assets 70.1 68.4
Property and equipment
Land and buildings 4.3 4.5
Computer hardware, software and other 19.0 20.1
Accumulated depreciation (15.7) (14.9)
Net property and equipment 7.6 9.7
Noncurrent deferred taxes 6.1 5.9
Goodwill, net 4.9 5.1
Other assets 11.3 10.8
Total assets 100.0 100.0

* There are some rounding differences

100
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-4 Continued

(In Percentage)
Liabilities and Stockholders’ Equity 2010 2009
Current liabilities:
Short-term borrowings and current portion of long-
term debt 5.8 6.1
Accounts payable and accrued liabilities 13.3 13.9
Accrued payroll and related taxes 17.8 15.9
Accrued insurance 2.3 1.7
Income and other taxes 4.1 3.6
Total current liabilities 43.2 41.2
Noncurrent liabilities
Long-term debt ---- 4.4
Accrued insurance 3.9 4.2
Accrued retirement benefits 6.2 5.9
Other long-term liabilities 1.1 1.2
Total noncurrent liabilities 11.2 15.6
Stockholders’ equity
Capital stocks $1.00 par value
Class A common stock 2.7 2.8
Class B common stock .3 .3
Treasury stock, at cost
Class A common stock (5.1) (8.1)
Class B common stock (0.0) (0.0)
Paid-in capital 2.0 2.8
Earnings invested in the business 43.7 43.5
Accumulated other comprehensive income 2.1 1.9
Total stockholders’ equity 45.6 43.2
Total liabilities and stockholders’ equity 100.0 100.0

* There are some rounding differences

101
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-4 Continued

b.
Kelly Services, Inc. and Subsidiaries
Balance Sheets
December 31, 2010 and December 31, 2009
Horizontal Common-Size Analysis

In Percentage
Assets 2010 2009
Current assets
Cash and equivalents 90.6 100.0
Trade accounts receivable 113.0 100.0
Prepaid expenses and other current assets 63.5 100.0
Deferred taxes 106.7 100.0
Total current assets 106.7 100.0
Property and equipment
Land and buildings 100.3 100.0
Computer hardware, software and other 98.6 100.0
Accumulated depreciation 110.0 100.0
Net property and equipment 81.8 100.0
Noncurrent deferred taxes 108.4 100.0
Goodwill, net 100.0 100.0
Other assets 108.6 100.0
Total assets 104.3 100.0

102
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-4 Continued

In Percentage
Liabilities and Stockholders’ Equity 2010 2009
Current liabilities
Short-term borrowings and current portion of long-
term debt 99.0 100.0
Accounts payable and accrued liabilities 99.5 100.0
Accrued payroll and related taxes 116.8 100.0
Accrued insurance 136.7 100.0
Income and other taxes 118.1 100.0
Total current liabilities 109.3 100.0

Noncurrent Liabilities
Long-term debt 0.0 100.0
Accrued insurance 97.6 100.0
Accrued retirement benefits 111.1 100.0
Other long term liabilities 91.3 100.0
Total noncurrent liabilities 74.8 100.0

Stockholders’ Equity
Capital stocks $1.00 par value
Class A common stock 100.0 100.0
Class B common stock 100.0 100.0
Treasury stock, at cost
Class A common stock 65.9 100.0
Class B common stock 100.0 100.0
Paid-in capital 75.9 100.0
Earnings invested in the business 104.6 100.0
Accumulated other comprehensive income 115.5 100.0
Total stockholders’ equity 110.1 100.0
Total liabilities and stockholders’ equity 104.3 100.0

103
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 5-4 Concluded

c. Vertical Common-Size Analysis

Assets
Substantial increase in trade accounts receivable. Trade accounts receivable
was already the dominate asset.

Noncurrent deferred taxes increased materially.

Liabilities and Stockholders’ Equity

Liabilities
These current liabilities increased materially; 1) accrued payroll and related
taxes, 2) accrued insurance, and 3) income and other taxes.

Long-term debt was retired, which resulted in total noncurrent liabilities

decreasing materially.

Stockholders’ Equity
Material decline in treasury stock, Class A.

Material decline in paid-in capital.

104
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
PROBLEM 5-5

Change Analysis
Item Year 1 Year 2 Amount Percent
1 4,000 ----- (4,000) 100
2 5,000 (3,000) (8,000) -----
3 (9,000) 2,000 11,000 -----
4 7,000 ----- (7,000) 100
5 ----- 15,000 15,000 -----

PROBLEM 5-6

Change Analysis
Item Year 1 Year 2 Amount Percent
1 ----- 3,000 3,000 -----
2 6,000 (4,000) (10,000)
3 (7,000) 4,000 11,000
4 4,000 ----- (4,000) 100
5 8,000 10,000 2,000 25

PROBLEM 5-7

a. 5 Most ratios are computed comparing selected income statement and

balance sheet numbers.

b. 1 A figure from the year’s statement is compared with a base selected from
the current year. This would be described as a vertical common-size
statement.

c. 3 Since we do not know the resources employed, Fremont Electronics could

be more profitable than Columbus Electronics in relation to resources
employed.

d. 5 The fact that financial services may be private independent firms does not
relate to industry ratios being considered as absolute norms for a given
industry.

e. 5 The Department of Commerce Financial Report is a publication of the

federal government for manufacturing, mining, and trade corporations.

f. 3 The Almanac of Business and Industrial Financial Ratios represents a

compilation of corporate tax return data.

g. 4 Industry Norms and Key Business Ratios, desktop edition, includes over
800 different lines of business.
105
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 h. 2 A horizontal analysis compares each amount with a base amount for a
selected base year.

i. 1 Relative numbers would be most meaningful for comparing two firms in

the coal industry.

j. 1 The statement “management is not interested in the view of investors”

does not represent a fair statement as to the management perspective.

PROBLEM 5-8

a.
December 31, Increase (Decrease)
2011 2010 Dollars Percent
Net sales $30,000 $28,000 $2,000 107.1
Cost of goods sold 20,000 19,500 500 102.6
Gross profit 10,000 8,500 1,500 117.6
Selling, general, and
administrative expense 3,000 2,900 100 103.4
Operating income 7,000 5,600 1,400 125.0
Interest expense 100 80 20 125.0
Income before taxes 6,900 5,520 1,380 125.0
Income tax expense 2,000 1,600 400 125.0
Net income 4,900 3,920 980 125.0

b. Net Sales increased substantially more than Cost of Goods Sold.

Net Sales increased substantially more than Selling, General, and Administrative
Expense.

Interest Expense, Income Tax Expense, and Net Income increased materiality
faster than Net Sales.

106
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.