Chapter 13, Problem 13.1AP

(a)

To determine

Vertical Analysis: Vertical analysis is prepared to analyze the relationship among various financial statements with a particular base amount. Use the following formula to calculate vertical analysis percentage:

Formula:

$\text{Vertical analysis percentage }=\left(\frac{\text{Specific item}}{\text{Base}\text{amount}}\right)\times 100$

This analysis is otherwise called as common-size statement.

Return on assets: Return on assets determines the particular company’s overall earning power.

Formula:

$\text{Rate of return on assets}=\frac{\text{Net}\text{income}}{\text{Average total assets}}$

Rate of return on stockholder’s equity: Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.

Formula:

$\text{Rate of return }=\frac{\text{Net income }-\text{Preferred dividends}}{\text{Average common stockholder’s equity}}$

To prepare: The vertical analysis of the income statement for Company P, and Company K for 2014.

(b)

To determine

To comment: On the relative profitability of the companies through return on assets and return on common stockholder’s equity for Company P and Company K.