Chapter 12
Using Accounting Information
362
Star Hotel
Percentage of Base-Figure Total Revenue
For the Year Ended December 31, 2014 - 2016
2016
2015
2014
Total Revenue
100%
100%
100%
Cost of Goods Sold
14%
12%
11%
Gross Profit
86%
88%
89%
Total Expenses
80%
84%
85%
Net Income
6%
4%
3%
_______________
Figure 12.11
This analysis reveals that gross profit has remained quite steady, but operating expenses have been
gradually falling in relation to total revenue.This indicates that sales have risen without causing as
much of an increase to operating expenses, allowing for more net income per dollar of sales.
Considering all of the conclusions, the bank decides to grant the loan to Star Hotel because it has
been growing steadily over the past three years and is in a healthy enough financial position to
expand operations without much risk.
The Star Hotel example used horizontal and vertical analysis tools to make a decision.While these
tools are helpful in providing insight on a company’s financial position, there are limitations to
what they can actually show. The tools do not consider errors in the figures. Also, the trends may
not continue because businesses change and evolve constantly. Fortunately, there are many other
analysis tools available to users.These will be discussed next.
Analyzing the Statements
Now that the balance sheet for a corporation has been introduced, it is time to discuss its analysis in
depth. We will use the financial statements of Second Cup Coffee Co. (Second Cup), a Canadian
corporation that sells specialty coffee and baked goods.The comparative balance sheet is shown in
Figure 12.12. As you have learned, this is an important tool in conducting horizontal and vertical
analysis, but it also allows users to easily calculate various financial ratios for the company to even
better understand its finances. There are several assets and liabilities listed which you may have
never seen before, but we will focus on the analysis of the statement as a whole rather than on
individual accounts.
We will dissect sections of the balance sheet to perform our analysis.The analysis will involve the
calculation of ratios. Ratios measure different aspects of a company’s financial situation, and they
are divided into four categories based on what they measure: liquidity, profitability, operations
management and leverage.
