Question

P14-1 Comparative statement data for Lionel Company and Barrymore Company, two competitors, appear below. All statement of financial position data are as of December 31, 2017, and December 31, 2016. Net sales Cost of goods sold Operating expenses Interest expense Income tax expense Plant assets (net) Current assets Share capital-ordinary, £5 par Retained earnings Non-current liabilities Current liabilities Lionel Company 2017 2016 £1,549,035 1,053,345 263,336 7,745 61,960 596,920 £575,610 401,584 388,020 578,765 578,765 252,224 225,358 102,500 84,000 65,015 75,507 Barrymore Company 2017 2016 £339,038 237,325 77,979 2,034 8,476 142,842 £128,927 86,450 82,581 137,435 137,435 55,528 47,430 16,711 11,989 19,618 14,654 Instructions (a) Prepare a vertical analysis of the 2017 income statement data for Lionel Company and Barrymore Company in columnar form. (b) - Comment on the relative profitability of the companies by computing the return on assets and the return on ordinary shareholders' equity for both companies.

Question

(a) Prepare a vertical analysis of the 2017 income statement data for Lionel Company and Barrymore Company in columnar form

(b) comment on the relative profitabiliyy of the companies by computing the return on assets and the return on ordinary shareholder's equity for both companies

Answer 1

Correct Answer:

Requirement a:

Vertical analysis income statement
	Lionel Company		Barrymore Company
	Amount	Percentage of Net sale	Amount	Percentage of Net sale
Net Sales	$ 15,49,035.00	100%	$ 3,39,038.00	100%
Cost of Goods sold	$ 10,53,345.00	68.0%	$ 2,37,325.00	70.0%
Gross Profit	$     4,95,690.00	32.0%	$ 1,01,713.00	30.0%
Less: Operating expenses	$     2,63,336.00	17.0%	$      77,979.00	23.0%
Less: Interest Expenses	$           7,745.00	0.5%	$        2,034.00	0.6%
Profit before tax	$     2,24,609.00	14.5%	$      21,700.00	6.4%
Income tax expenses	$        61,960.00	4.0%	$        8,476.00	2.5%
Net Income	$     1,62,649.00	10.5%	$      13,224.00	3.9%

Requirement b:

	Net income	/	Average Total Assets	=	Return on Assets
Lionel Company	$ 1,62,649.00	/	$ 9,81,067.00	=	16.58%
Barrymore company	$      13,224.00	/	$ 2,20,400.00	=	6.00%

Working:

Lionel Company
	2017	2016
Plants Assets	$     5,96,920.00	$ 5,75,610.00
Current Assets	$     4,01,584.00	$ 3,88,020.00
Total Assets	$     9,98,504.00	$ 9,63,630.00
Average Total Assets = (Total Assets 2017 + 2016 ) /2	$     9,81,067.00

Barrymore company
		2017				2016
Plants Assets		$             1,42,842.00				$   1,28,927.00
Current Assets		$                 86,450.00				$       82,581.00
Total Assets		$             2,29,292.00				$   2,11,508.00
Average Total Assets = (Total Assets 2017 + 2016 ) /2		$             2,20,400.00
	Net income		/	Ordinary shareholder's Equity	=	Return on Equity
Lionel Company	$ 1,62,649.00		/	$        5,78,765	=	28.10%
Barrymore company	$      13,224.00		/	$        1,37,435	=	9.62%

On Analysing the Return on Assets and Return on Equity it can be clearly said that Lionel company is generating more profits than Barrymore Company.

End of answer.

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Answer 2