Comparison& Analysis
Comparing a company's earnings in 2025 to 2024 is an example of
Horizontal Analysis
Current assets = $300,000; current liabilities = $150,000. Current ratio
2.0
Net sales = $2,000,000; gross profit = $800,000. Compute the gross profit ratio.
40%
Cash from selling goods belongs to
Operating activities
Reporting higher income, higher assets, and lower liabilities is an example of
Aggressive Accounting
Expressing each balance sheet item as Percentage of total assets is called
Vertical Analysis
Quick assets = $120,000; current liabilities = $100,000. Acid‑test ratio
1.2
Net income = $250,000; beginning assets = $2,400,000; ending assets = $2,600,000. Compute the return on assets (ROA).
(2,400,000+2,600,000)/2 = 2,500,000; ROA = 250,000 ÷ 2,500,000 = 10%
Net income = $75,000. Depreciation = $12,000. A/R increases $8,000. Inventory decreases $5,000. Accounts payable decreases $4,000. Compute net cash flows from operating activities.
75,000 + 12,000 – 8,000 + 5,000 – 4,000 = $80,000
Reporting lower income, lower assets, and higher liabilities is an example of
Conservative Accounting
Comparing Nike’s risk level to the apparel industry average is an example of
Industry Comparison
Net credit sales = $480,000; average A/R = $60,000. Receivables turnover
8.0 times
Net income = $300,000; beginning equity = $1,000,000; ending equity = $1,400,000. Compute the return on equity (ROE).
Avg. equity = (1,000,000+1,400,000)/2 = 1,200,000; ROE = 300,000 ÷ 1,200,000 = 25%
A company sells equipment for $18,000 cash. Original cost = $40,000; accumulated depreciation = $25,000. What is the cash flow classification and amount reported?
Investing Activity; $18,000 inflow
Book Value = $40,000 – $25,000 = $15,000
Gain = $18,000 – $15,000 = $3,000
Cash inflow reported = $18,000
A company delays recording bad debt expense until future periods. This is an example of
Aggressive Accounting
Net sales = $600,000; COGS = $360,000. Gross profit ratio
40%
Net income = $80,000; interest expense = $10,000; tax expense = $20,000. Times interest earned
11.0
Net income = $200,000
Net sales = $1,600,000
Average assets = $1,000,000
Compute:
Formula: Net income ÷ Net sales
= 200,000 ÷ 1,600,000
= 12.5%
Asset Turnover
Formula: Net sales ÷ Average assets
= 1,600,000 ÷ 1,000,000
= 1.6 times
3. Return on Assets (ROA)
Formula: Net income ÷ Average assets
= 200,000 ÷ 1,000,000
= 20%
Net income = $40,000; depreciation = $5,000; A/R increases $3,000. Net cash from operations
$42,000
A $50,000, 6% note payable for 1 year will incur how much interest?
3,000
Net income = $90,000; average assets = $1,200,000. Return on assets
7.5%
Total liabilities = $500,000; equity = $250,000. Debt‑to‑equity ratio
2.0
Stock price = $60; net income = $240,000; preferred dividends = $40,000; average common shares = 50,000. Compute EPS and the PE ratio.
EPS = (240,000–40,000) ÷ 50,000 = 200,000 ÷ 50,000 = $4.00; PE = 60 ÷ 4 = 15
Buying equipment with a $25,000 note payable is reported as a
Noncash Activity
A company issues 1,000 shares of $1 par stock at $20 per share. Additional Paid‑in Capital
$19,000