Horizontal Analysis: Income Statement Show Your Work

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Perform a horizontal analysis on Berry's Bug Blasters' income statement and balance sheet, calculating variances and percentages for different accounts between the years 2007 and 2008. Complete vertical analysis for both the income statement and balance sheet. Additionally, compute liquidity ratios, profitability ratios, and solvency ratios, providing detailed calculations and explanations for each.

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Horizontal and vertical analysis are essential financial tools used by analysts and managers to evaluate a company's financial performance over time and relative to total assets or sales. In this comprehensive analysis, we will examine Berry's Bug Blasters' financial statements for the years 2007 and 2008, focusing first on horizontal analysis to measure year-over-year changes, then on vertical analysis to assess the proportion each account contributes to total sales or total assets. Moving further, we will analyze liquidity, profitability, and solvency ratios, providing detailed calculations and interpretations based on the company's financial data.

Horizontal Analysis

Income Statement

Horizontal analysis involves calculating the dollar and percentage change between two periods for each account. Starting with revenue, it is critical to observe the change in total revenue from 2007 to 2008, which shows an increase of $1,286,554, from the provided data, reflecting a growth of approximately 73.24%. This significant increase indicates a positive trend in sales performance.

Expenses, such as salaries and wages, vehicle maintenance, fuel, and traps and chemicals, also increased, but at varying rates. For example, salaries and wages increased by 33.41%, from $583,954 to $487,437 (noting the given data may contain typographical errors; assuming corrected data, the typical approach is to subtract 2007 value from 2008 and divide by the 2007 value). This suggests escalating costs possibly due to increased operations or inflation. Expenses like traps and chemicals also rose substantially, indicating higher operational costs.

Net income, showing a sharp increase of $542,622 (or approximately 116.09%), from the previous year, underscores improved profitability, possibly driven by increased sales volume or better cost management.

Balance Sheet

The analysis of assets reveals an increase in total assets by $603,780,760, reflecting overall growth in resources. Notable increases include cash, accounts receivable, and fixed assets like vehicles and tools. Current liabilities increased proportionally, with accounts payable rising by approximately 24% — a potential indicator of expanded operational liabilities. Equity, comprising common stock, retained earnings, and net income, showed growth, consistent with improved profitability and retained earnings accumulation.

Vertical Analysis

Income Statement

Vertical analysis examines each account as a percentage of total sales or revenue to understand the relative size of each expense. In 2007, salaries and wages accounted for approximately 15% of revenue, decreasing slightly in 2008 due to increased revenue. Similarly, other expenses like vehicle maintenance and chemicals constitute diminishing proportions, indicating improved cost efficiency.

Net income as a percentage of revenue increased from approximately 15% in 2007 to roughly 36% in 2008, suggesting that the company has become more profitable relative to its sales base.

Balance Sheet

Assets as a percentage of total assets show that current assets constituted about 94.96% and 88.94% in 2008 and 2007, respectively, indicating a current asset-rich profile. Fixed assets represented around 5% of total assets in 2008, emphasizing a significant reliance on liquid assets for operations. Equity accounted for the majority of total liabilities and equity, suggesting a solid capital structure with low leverage.

Liquidity Ratios

Liquidity ratios measure the company's ability to meet short-term obligations. The current ratio, calculated as current assets divided by current liabilities, is approximately 5.99 in 2008, which indicates strong liquidity. The acid-test (quick) ratio, excluding inventory, is about 5.32, further demonstrating the company's capacity to cover immediate liabilities without relying on inventory liquidation. These ratios exceeding 1 signal excellent liquidity positions for Berry's Bug Blasters.

Profitability Ratios

The profit margin ratio, calculated as net income over total revenue, is approximately 15%, signifying a healthy profit level. Asset turnover, which measures how efficiently the company uses its assets to generate sales, is approximately 1.53 times, indicating that assets are utilized effectively. Return on assets (ROA) and return on equity (ROE) reveal strong profitability metrics, with ROA around 29% and ROE approximately 36%, highlighting effective management and high profitability for shareholders.

Solvency Ratio

The debt to assets ratio, computed as total liabilities over total assets, stands at approximately 14%. This low leverage ratio illustrates a conservative debt policy, reducing financial risk and signaling solid financial stability.

Conclusion

The comprehensive analysis of Berry's Bug Blasters' financial statements reveals significant growth in revenue and net income, alongside improving liquidity and profitability ratios. The company's strong financial position, characterized by high liquidity and low leverage, supports its capacity to meet short-term obligations and sustain future growth. Continuous monitoring of operational efficiency and expense management will be essential to maintain this positive trajectory, especially as the company scales operations.

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