Chapter 12
Using Accounting Information
360
To calculate the percentages, we will use the following formula.
=
Line item account balance
Percentage of base-figure
Base-figure account balance
To start, a base-figure must be selected. In 2016, Star Hotel had a total asset balance of $600,000.
Next, divide all line items in the 2016 balance sheet by the base-figure selected. For cash, divide the
balance of $8,000 by the total assets.The result is 0.01 or 1%.
$8,000
=
0.01
or
1%
$600,000
This type of analysis reveals that cash currently only represents 1% of total assets. Star Hotel should
consider holding more cash in case of unexpected events. Fortunately, current assets represent 27%
of total assets and have grown to more than double that of current liabilities.Using this information,
the bank decides that Star Hotel is in an overall healthy financial position.
The next step is to use the same tools to analyze the company’s income statement. Horizontal
analysis is done in much the same way on the income statement as it is on the balance sheet. Star
Hotel’s comparative income statement is shown in Figure 12.9 for the past three years.
Star Hotel
Income Statement
For the Year Ended December 31, 2014 - 2016
2016
2015
2014
Revenue
Service Revenue
$270,000 $200,000 $180,000
Food Sales Revenue
80,000
50,000
40,000
Total Revenue
350,000
250,000 220,000
Cost of Goods Sold
50,000
30,000
25,000
Gross Profit
300,000
220,000 195,000
Operating Expenses
Advertising Expense
33,000
15,000
5,000
Depreciation Expense
15,000
15,000
15,000
Insurance Expense
12,000
12,000
12,000
Salaries Expense
200,000
150,000 140,000
Supplies Expense
20,000
18,000
15,500
Total Expenses
280,000
210,000 187,500
Net Income
$20,000
$10,000
$7,500
_______________
Figure 12.9
The comparative income statement allows the bank to quickly see which revenues and expenses
have increased or decreased and whether net income is rising or falling. Star Hotel has seen a large
increase in revenue, perhaps attributable to an increased advertising budget. The company’s net
