Income statements for Jordan Company for Year 3 and Year 4 follow: JORDAN COMPANY Income Statements Year 4 Year 3 Sales $ 202,000 $ 182,000 Cost of goods sold 142,600 120,600 Selling expenses 20,800 18,800 Administrative expenses 12,800 14,800 Interest expense 3,300 5,300 Total expenses $ 179,500 $ 159,500 Income before taxes 22,500 22,500 Income taxes expense 6,700 3,400 Net income $ 15,800 $ 19,100 Required a. Perform a horizontal analysis, showing the percentage change in each income statement component between Year 3 and Year 4. b. Perform a vertical analysis, showing each income statement component as a percentage of sales for each year.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Income statements for Jordan Company for Year 3 and Year 4 follow:
| JORDAN COMPANY Income Statements |
|||||||
| Year 4 | Year 3 | ||||||
| Sales | $ | 202,000 | $ | 182,000 | |||
| Cost of goods sold | 142,600 | 120,600 | |||||
| Selling expenses | 20,800 | 18,800 | |||||
| Administrative expenses | 12,800 | 14,800 | |||||
| Interest expense | 3,300 | 5,300 | |||||
| Total expenses | $ | 179,500 | $ | 159,500 | |||
| Income before taxes | 22,500 | 22,500 | |||||
| Income taxes expense | 6,700 | 3,400 | |||||
| Net income | $ | 15,800 | $ | 19,100 | |||
Required
a. Perform a horizontal analysis, showing the percentage change in each income statement component between Year 3 and Year 4.
b. Perform a vertical analysis, showing each income statement component as a percentage of sales for each year.
Horizontal analysis is one of the form of financial statements analysis, under which each item is compared with previous year in form of absolute amounts or in form of percentages. Vertical analysis is another analysis under which each item is being compared with total revenues and total assets in the business.
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