1. b.

This is the definition of vertical analysis. For example, all income statement items within the same year are shown as a percentage of sales.

2. b.

The increase in sales is $5 million. 5 ¸ 20 = 25%

3. d.

Cost of goods sold grew 30% from 2000 to 2001 while sales only grew 20%. Answers a. and c. are incorrect because they are referring to "margin" which is the percentage arising from vertical analysis whereas the above statement is reporting a horizontal analysis. Answer b. in incorrect because the opposite of the statement is true; sales are growing slower than cost of goods sold. To be correct, answer c should say that the six percent increase in the amount of gross profit stated in dollars is 6% greater in 2001 compared to 2000.

4. a.

The cash increase of $20,000 ¸ 100,000 = 20%. The decrease in Notes payable is $30,000 and when divided by the 60,000 amount for year 2000 the decrease is 50%. The common stock increase of $100,000 ¸ 200,000 = 50%.

5. c.

If the question asked for the vertical analysis for year 2000, a. would be correct. For 2001, all items should be shown as a percentage of sales which is the base amount of 100%. Cost of goods sold would be $275,000 ¸ $500,000 or 55% and gross profit on sales would be $225,000 ¸ $500,000 or 45%.

6. a.

Current assets are liquid assets meaning that they are convertible into cash. Fixed assets are not liquid. Two-thirds of Small’s assets are current whereas only one-half of Large’s assets are current. As to the incorrect responses, there is no way to determine from this analysis if earnings growth is larger for one company versus the other. The same is true for answer d. There is no way to determine how old the equipment is for either company from this analysis. As for answer c, about one third of Small's assets are financed by debt whereas three fourths of Large's assets are financed through debt.

7. d.

For Large, liabilities are three times shareholders’ equity. For Small, liabilities are only one-half of shareholders’ equity. Large is the riskier company.

8. b.

The GPM is calculated by dividing gross profit on sales by sales and in 2001 is 45% and is 50% in 2000.

9. c.

The 1997 ITR is $3,285,186 ¸ $500,000 = 6.57; the ITR for 1998 is COGS of 4,021,541 ¸ (average inventory = 733,174 + 578,765 ¸ 2) = 6.13 times. Converting these both to days, for 1997 it would be 56 days, and for 1998 it would be 60 days of inventory in COGS or 4 additional days.

10. d.

The ROS is calculated by dividing net income by sales and it is 8.6% in 1997 and 8.2% (lower) in 1998. EPS is calculated by dividing the net income by the average shares outstanding. Don't forget to multiply the net income by 1,000 since the provided numbers (except the shares outstanding) are 000's omitted. The EPS for 1998 is $1.35 and it is lower in 1997 or $1.09.

11. a.

Shareholders' equity increased by $8 during the year due entirely to retained earnings as there was no change in contributed capital (stock). Since net income would have increased retained earnings by $15, the company must have had $7 in dividends since the overall increase was only $8.

12. b.

The fixed asset, net account decreased by $5 during the year. Since the recording of depreciation of $9 would have caused a decrease of $9, the company must have purchased $4 in fixed assets so that the net decrease for the period was $5.