Question

Problem B Deere & Company manufactures, distributes, and finances a full range of agricultural equipment; a broad range of industrial equipment for construction, forestry, and public works; and a variety of lawn and grounds care equipment. The company also provides credit, health care, and insurance products for businesses and the general public. Consider the following information from the Deere & Company Annual Report:

(in millions)	Year 1	Year 2	Year 3	Year 4
Sales	$12,791	$13,822	$11,751	$13,137
Cost of goods sold	8,481	9,234	8,178	8,936
Gross margin	4,310	4,588	3,573	4,201
Operating expenses	2,694	2,841	3,021	3,236
Net operating income	$ 1,616	$ 1,747	$ 552	$ 965

1. Prepare a statement showing the trend percentages for each item using Year 1 as the base year.
2. Use Years 3 (Base Year) and 4 and prepare horizontal analysis showing both dollar change and percentage change.
3. Use Years 3 and 4 and prepare common size income statements (also known as vertical analysis) for both years.

Answer 1

statement showing the trend percentages for each item using Year 1 as the base year
(in millions)	Year 1		Year 2		Year 3		Year 4
Sales	12,791	100%	13,822	108.06%	11,751	91.87%	13,137	102.71%
Cost of goods sold	8,481	100%	9,234	108.88%	8,178	96.43%	8,936	105.36%
Gross margin	4,310	100%	4,588	106.45%	3,573	82.90%	4,201	97.47%
Operating expenses	2,694	100%	2,841	105.46%	3,021	112.14%	3,236	120.12%
Net operating income	1,616	100%	1,747	108.11%	552	34.16%	965	59.72%
Sales Year 2 trend percentage using Year 1 as base year = 13822/12791 =108.06%

Horizontal analysis showing both dollar change and percentage change for Year 3 (Base year) and 4

(in millions)	Year 3	Year 4	Change
			$	%
Sales	11,751	13,137	1,386	11.79%
Cost of goods sold	8,178	8,936	758	9.27%
Gross margin	3,573	4,201	628	17.58%
Operating expenses	3,021	3,236	215	7.12%
Net operating income	552	965	413	74.82%

Common size income statements for the years 3 and 4
(in millions)	Year 3		Year 4
Sales	11,751	100.00%	13,137	100.00%
Cost of goods sold	8,178	69.59%	8,936	68.02%
Gross margin	3,573	30.41%	4,201	31.98%
Operating expenses	3,021	25.71%	3,236	24.63%
Net operating income	552	4.70%	965	7.35%