1. For questions 1-3 the three comparative analysis tools are:
1) In Horizontal Analysis (or trend analysis) you evaluate financial statement data over a certain period of time. Ex: You compare intracompany financials from 2 years at Parker Paper Products Company.
2) Vertical Analysis entails evaluation of the financial statement data whereby each data item is shown as a percent of the base amount. Using Net Sales as the base amount, in an income statement, you compute the percentage of income items for Parker Shoe Company and compare it to the percentage of income from Thomas Shoe Company.This way you can see how one is faring financially compared to the competitor.
3) Ratio Analysis involves analyzing data as an expression of relationship between certain financial statement data items. This tool is useful in detecting underlying problems that are not evident otherwise.
Decide which tool you would use based on each circumstance described.
Leatherbury Inc., which produces fine leather purses, wants to see how well it has performed during the last decade.
(Points : 2) Horizontal
Ratio Analysis
Vertical Analysis
Question 2. 2. Leatherbury Inc. management wants to explain to its financial backers how the data on its net sales relates to the inventory. (Points : 2)
Horizontal
Ratio Analysis
Vertical Analysis
Question 3. 3. The Leatherbury Inc. firm management wants to use percentage data to help investors understand their financial condition. (Points : 2)
Horizontal
Ratio Analysis
Vertical Analysis
Question 4. 4. Practice example: Nike, Inc. had current assets of $10,959 million and current liability of $3,364 million of current liabilities. Here we have basic information concerning current assets and current liabilities. What else does this tell us about the firm? If we apply ratio analysis we can determine that current assets are .326% of current liabilities and that current assets are 3.26 times current liabilities and that the relations of current assets to liabilities is 3.26:1
Now using your critical thinking skills (thinking beyond the obvious), the general use of financial statements, along with what you practiced concerning financial statement analysis tools, answer the following:
Scenario: Leatherbury Inc. a leading U.S. retailer has decided to expand globally by purchasing a small clothing manufacturing plant to reduce some of their production costs.
Discuss which of the financial statement analytical tools you would recommend be utilized before making this business decision. (Points : 3)