Chapter 3, Problem 3.3ADM

A.

To determine

Vertical analysis:

Vertical analysis is the method of financial statement analysis, and it is useful to evaluating a company’s performance and financial condition. Vertical analysis is helpful for analyzing the changes in the financial statements over the time, and comparing the each item on a financial statement with a total amount from the same statement. In the vertical analysis, the financial statements are analyzed in the following manner:

• In vertical analysis of a balance sheet, each asset item is stated as a percent of the total asset, and each liability and owner’s equity item is stated as a percent of total liabilities and owner’s equity.
• In vertical analysis of an income statement, each item of revenue and expense is stated as a percent of total revenues of the business.

The amount and percentage of change in the net income from year 1 to year 2.

B.

To determine

The percentage relationship between net income and sales of year 2 and year 1.

C.

To determine

To explain: The conclusion drawn from the analysis.