Go to content

Analysis Answer - New Project 5

Decision Making
Bean Counter
Title
Skip menu
Skip menu

Analysis Answer

Practice Problem: InnovateTech Solutions Inc. Financial Analysis
Here is a practice problem about horizontal and vertical analysis, along with its solution.I

InnovateTech Solutions Inc. has provided its financial statements for the past three years. Your task is to perform both horizontal and vertical analysis on the provided Balance Sheets and Income Statements. Then, briefly interpret one key insight from each type of analysis.

To solve this problem, we will perform horizontal analysis and vertical analysis for both the Balance Sheet and the Income Statement.

Balance Sheet
Year 1
Year 2
Year 3
Assets

Cash
50
65
70
Accounts Receivable
120
140
160
Inventory
80
90
100
Property,Plant,  & Equipment
250
280
300
Total Assets
500
575
630
Liabilities



Accounts Payable
70
80
85
Short Term Debt
30
35
40
Long Term Debt
150
160
170
Total Liabilities
500
575
630
Equity



Common Stock
100
100
100
Retained Earnings
150
200
235
Total Equity
250
300
335
Total Liabilities & Equity
500
575
630
Income Statement
Year 1
Year 2
Year 3
Revenue
1000
1150
1300
Cost Of Goods Sold
600
670
750
Gross Profit
400
480
550
Operating Expenses
250
280
310
Operating Income
150
200
240
Interest Expense
15
18
20
Earnings Before Tax
135
182
220
Income Tax Expense
30
40
48
Net Income
105
142
172




Horizontal Analysis

Horizontal analysis, also known as trend analysis, involves comparing financial statement line items over a period of time to identify trends and growth rates. It expresses the change as a percentage of the base year (the earliest year in the comparison period). This type of analysis helps in understanding the year-over-year growth or decline of specific accounts and overall financial performance.

The formula for horizontal analysis is: Percentage Change = ((Current Year Value - Prior Year Value) / Prior Year Value) * 100%

InnovateTech Solutions Inc. - Horizontal Analysis of Balance Sheet (Percentage Change from Prior Year)

Year 1 -Year 2
Year 2 -Year 3
Assets

Cash
30%
7.7%
Accounts Receivable
16.7%
14.3%
Inventory
12.5%
11.1%
Property,Plant,  & Equipment
12.0%
7.1%
Total Assets
15.0%
9.6%
Liabilities


Accounts Payable
14.3%
6.3%
Short Term Debt
16.7%
14.3%
Long Term Debt
6.7%
4.3%
Total Liabilities
10.0%
7.3%
Equity


Common Stock
0%
0%
Retained Earnings
33.3%
17.5%
Total Equity
20.0%
11.7%
InnovateTech Solutions Inc. - Horizontal Analysis of Income Statement (Percentage Change from Prior Year)

Year 1 - Year 2
Year 2 - Year 3
Revenue
15.0%
13.0%
Cost Of Goods Sold
11.7%
11.9%
Gross Profit
20.0%
14.6%
Operating Expenses
12.0%
10.7%
Operating Income
33.3%
20.0%
Interest Expense
20.0%
11.1%
Earnings Before Tax
34.8%
20.9%
Income Tax Expense
33.3%
20.0%
Net Income
35.2%
21.1%



Vertical Analysis

Vertical analysis, also known as common-size analysis, expresses each financial statement line item as a percentage of a base figure within the same statement. For the Balance Sheet, total assets (or total liabilities and equity) is typically the base. For the Income Statement, total revenue (or sales) is the base] This analysis helps in understanding the proportional composition of the financial statements and how these proportions change over time, allowing for easier comparison across different periods or with industry benchmarks.

The formula for vertical analysis is: Percentage = (Line Item Value / Base Value) * 100%

InnovateTech Solutions Inc. - Vertical Analysis of Balance Sheet (As a Percentage of Total Assets)

Year 1
Year 2
Year 3
Assets

Cash
10.0%
11.3%
11.1%
Accounts Receivable
24.0%
24.30
25.4%
Inventory
16.0%
15.7%
15.9%
Property,Plant,  & Equipment
50.0%
48.7%
47.6%
Total Assets
100.0%
100.0%
100.0%
Liabilities



Accounts Payable
14.0%
13.9%
13.5%
Short Term Debt
6.0%
6.1%
6.3%
Long Term Debt
30.0%
27.8%
27.0%
Total Liabilities
50.0%
47.8%
46.8%
Equity



Common Stock
20.0%
17.4%
15.9%
Retained Earnings
30.0%
34.8%
37.3%
Total Equity
50.0%
52.2%
53.2%
Total Liabilities & Equity
100.0%
100.0%
100.0%
InnovateTech Solutions Inc. - Vertical Analysis of Income Statement (As a Percentage of Revenue)

Skip menu

Year 1
Year 2
Year 3
Revenue
100.0%
100.0%
100.0%
Cost Of Goods Sold
60.0%
58.3%
57.7%
Gross Profit
40.0%
41.7%
42.3%
Operating Expenses
25.0%
24.3%
23.8%
Operating Income
15.0%
17.4%
18.5%
Interest Expense
1.5%
1.6%
1.5%
Earnings Before Tax
13.5%
15.8%
17.0%
Income Tax Expense
3.0%
3.5%
3.7%
Net Income
10.5%
12.3%
14.3%




Title
Lorem ipsum dolor sit amet, consectetur adipiscing elit.
Back to content