Horizontal Analysis of Balance Sheets and Income Statements

Horizontal analysis of the balance sheets and income statements for Great Oaks Furniture

Great Oaks Furniture	December 31,
Balance Sheet	2012 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2011	Change	Percent
Assets			Change
Current assets
Cash	41,200	53,000	-11,800	-22.26
Accounts receivable	5,70,000	4,43,000	1,27,000	28.67
Inventory	50,70,000	48,41,000	2,29,000	4.73
Prepaid expenses	83,800	78,000	5,800	7.44
Total current assets	57,65,000	54,15,000	3,50,000	6.46
Building and equipment, net	10,97,000	10,95,000	2,000	0.18
Total assets	68,62,000	65,10,000	3,52,000	5.41
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	6,04,000	6,24,000	-20,000	-3.21
Bank loan payable	6,79,000	6,25,000	54,000	8.64
Other accrued payables	2,13,000	3,13,000	-1,00,000	-31.95
Total current liabilities	14,96,000	15,62,000	-66,000	-4.23
Long-term debt	17,29,000	17,97,000	-68,000	-3.78
Total liabilities	32,25,000	33,59,000	-1,34,000	-3.99
Stockholders’ equity
Common stock	13,59,000	13,59,000	–	–
Retained earnings	22,78,000	17,92,000	4,86,000	27.12
Total stockholders’ equity	36,37,000	31,51,000	4,86,000	15.42
Total liabilities and stockholders’ equity	68,62,000	65,10,000	3,52,000	5.41

From the above analysis we can see that there have been major changes in cash, accounts relievable, other accrued payables, retained earnings and total equity.

There has been a decline in cash and increase in accounts receivable. This may be explained if the company has increased its credit sales and declined its cash sales, because of which the cash has declined and trade receivables have increased. Since both the items belong to the current asset group, due to opposite movements there is no major change at the current asset total level. Also, we see that total outstanding payables have increased; this may be due to shortage of cash. There has been major increase in retained earnings due to profits and may be due to changes in reserves.

	Year Ended
Great Oaks Furniture	December 31,	Change	Percent
Statement of Earnings	2012	2011	Change
Net sales	55,68,000	52,53,000	3,15,000	6.00
Cost of goods sold	28,40,000	26,27,000	2,13,000	8.11
Gross margin	27,28,000	26,26,000	1,02,000	3.88
Operating expenses:
Selling expenses	5,01,000	6,30,000	-1,29,000	-20.48
General and administrative expenses	8,35,000	7,88,000	47,000	5.96
Total operating expenses	13,36,000	14,18,000	-82,000	-5.78
Operating income	13,92,000	12,08,000	1,84,000	15.23
Interest expense	1,39,000	1,58,000	-19,000	-12.03
Income before taxes	12,53,000	10,50,000	2,03,000	19.33
Income taxes	4,39,000	3,68,000	71,000	19.29
Net income	8,14,000	6,82,000	1,32,000	19.35

From the above calculations we can see that the area of major changes are selling expenses, operating income, interest expense, income before taxes, income taxes and net income.

Due to decline in selling expenses there has been increase in total operating income. Further we see that there has also been a decline in the interest expense. Due to reduction in expenses the incomes before taxes have increased by almost 19%. Further, we see that there has been an increase in income tax expense; this is due to higher taxable income, reason for which has already been explained. This overall leaves us with a 19% increased net income. Therefore, reduction in expenses has resulted in higher profits and higher taxes.

Great Oaks Furniture
Balance Sheets
	December 31, 2012	December 31, 2011
Assets
Current assets
Cash	41,200	0.60	53,000	0.81
Accounts receivable	5,70,000	8.31	4,43,000	6.80
Inventory	50,70,000	73.89	48,41,000	74.36
Prepaid expenses	83,800	1.22	78,000	1.20
Total current assets	57,65,000	84.01	54,15,000	83.18
Building and equip, net	10,97,000	15.99	10,95,000	16.82
Total assets	68,62,000	100.00	65,10,000	100.00
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	6,04,000	18.73	6,24,000	18.58
Bank loan payable	6,79,000	21.05	6,25,000	18.61
Other accrued payables	2,13,000	6.60	3,13,000	9.32
Total current liabilities	14,96,000	46.39	15,62,000	46.50
Long-term debt	17,29,000	53.61	17,97,000	53.50
Total liabilities	32,25,000	100.00	33,59,000	100.00
Stockholders’ equity
Common stock	13,59,000	37.37	13,59,000	43.13
Retained earnings	22,78,000	62.63	17,92,000	56.87
Total stockholders’ equity	36,37,000	100.00	31,51,000	100.00
Total liabilities and stockholders’ equity	68,62,000		65,10,000

From the above calculations we see that in the assets section the proportion of weight-age have not changed from last year. The current assets form 83-84% of the total assets and the remaining is covered by non-current assets.

Same is the case with total liabilities section. The current liabilities make up about 47% of the total liabilities and the remaining is covered by long term debt. In the stock holders equity we can see that the proportion of retained earnings have increased from 57% to 63%, which has resulted in fall of common stock share in total stockholders’ equity. Therefore, we can say that vertically there are not many changes in the balance sheet of Great Oaks Furniture.

Statement of Earnings
	December 31, 2012	December 31, 2011
Net sales	55,68,000	100.00	52,53,000	100.00
Cost of goods sold	28,40,000	51.01	26,27,000	50.01
Gross margin	27,28,000	48.99	26,26,000	49.99
Operating expenses:
Selling expenses	5,01,000	9.00	6,30,000	11.99
General and admin exp	8,35,000	15.00	7,88,000	15.00
Total operating expenses	13,36,000	23.99	14,18,000	26.99
Operating income	13,92,000	25.00	12,08,000	23.00
Interest expense	1,39,000	2.50	1,58,000	3.01
Income before taxes	12,53,000	22.50	10,50,000	19.99
Income taxes	4,39,000	7.88	3,68,000	7.01
Net income	8,14,000	14.62	6,82,000	12.98

From the above calculations we can say that there are not many changes in the statement of earnings of great oak furniture vertically. The proportions of expenses have been more or less in a similar trend. Only a little change has been noticed in the selling expense and interest expense. The net income of the company has increased from 12.98% to 14.62%. The major contributors to increase in net income are decline in selling and interest expenses. (Fridson & Alvarez, 2012)

Vertical Analysis of Balance Sheets and Income Statements

Calculation of earnings per share, the price-earnings ratio, the gross margin percentage, returns on total assets, and return on common stockholders’ Equity

We have calculated a few ratios for great oak furniture. We should keep in mind that there are various factors which affect the ratios of the company such as inflation rate, seasonal changes, changes in accounting practices, etc.

	2012	2011
Earnings per share	8.14	6.82

The EPS per share of the company has increased from $ 6.82 to $8.14 in the year 2012. This is due to higher profits earned by the company in 2012.

	2012	2011
Price-earnings ratio	16.46	16.13

There has been not much change in PE ratio of the company. This is because the earnings and the stock price both have increased.

	2012	2011
Gross margin percentage	48.99	49.99

We see that there has been a 1% change in gross margin ratio of the company. This is due to increase in cost of goods sold.

	2012	2011
Return on total assets	11.86	10.48

Returns on total assets ratio have been increased due to higher rate of increase in total income than in total assets.

	2012	2011
Return on common stockholders’ equity	22.38	21.64

Return on Stockholders’ equity has increased from 21.64% to 22.38% due to higher profits earned by the company in the current year.Calculation of asset turnover, accounts receivable turnover, days’ sales in receivables, inventory turnover, and days’ sales in inventory

	2012	2011
Asset turnover	0.81	0.81

We see that there has not been change in the asset turnover ratio of the company. This is because assets and sales have both increased in same proportion.

	2012	2011
Accounts receivable turnover	9.77	11.86

We see that the accounts receivable turnover of the company has declined from 11.86 days to 9.77 days. This is due to increase in credit sales by the company.

	2012	2011
Days’ sales in receivables	37.37	30.78

This ratio indicates the number of days in which sales made will help recover the accounts receivable amount. Since there has been an increase in accounts receivable of the company, the ratio has increased from 31 to 37 days.

	2012	2011
Inventory turnover	1.10	1.09

	2012	2011
Days’ sales in inventory	332.35	336.37

Since there is not much change in the inventory turnover the days sales in inventory ratio also has not changed much.

Calculation of the current ratio, the acid-test ratio, the debt-to-equity ratio and times interest earned

The following ratios will help us evaluate the financial stability of the company and help us decide if it is safe to lend to Great Oaks Furniture. (Ittelson, 2009)

	2012	2011
Current ratio	3.85	3.47

The most suitable current ratio is 2. The company has a very good current ratio. This indicates high availability of current funds.

	2012	2011
Acid-test ratio	0.46	0.37

We see that the acid test ratio of the company is very low. This indicates that the company has its major fund stuck in the inventory. Company need to have high inventory turnover in order to keep the funds moving.

	2012	2011
Debt-to-equity ratio	0.48	0.57

Company has a low debt to equity ratio. This indicates that the company has been working on owned funds. It has the scope to take up loans.

	2012	2011
Times interest earned	10.01	7.65

The times interest earned b the company has increased from 7.65 times to 10 times. This indicates that the company earns 10 times of its interest expense and can easily payoff its debt expenses.

Form the above we can conclude that the company a stable financial structure and performance. It would be safe to lend to the company since it has high liquidity and also high income which can help the lenders recover the interest expenses.

Cash flow from operations was $645,590 for 2005 and $795,823 for 2005. Does this suggest that management of Great Oaks Furniture has manipulated earnings upward in these years?

	2012	2011
Net income versus cash flow from operations
Net income	814000	682000
Cash flow from operations	795823	645590
Difference	18177	36410

From the above table we can see that though the net income of the company has increased from $682000 to $ 814000, the cash inflow has not been in the same proportion. This can be due to many reasons. Higher profits may be due to upward revaluation, writing off of a liability, etc. Also, the reasons for lower cash flows may be higher credit transactions, less mobility of resources, etc. Therefore to conclude that the company has been manipulating earnings would be wrong. We need to carry a thorough analysis and collect all information in order to understand the changes in the financials.

References

Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley & Sons.

Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press.