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Income statement and vertical analysis

 

Competencies

  • Analyze the role of accounting in business operations.
  • Apply the principles of accrual accounting and accounting cycles.
  • Appraise the financial health and performance of a company.
  • Analyze cost behaviors and production costing methods.
  • Employ accounting data for business analysis and prediction.
  • Evaluate accounting-related legal and ethical business implications.

Scenario

The Vice President of Finance called you into a meeting to discuss the overall vision and future of your company. He states that he has always admired International Business Machines (IBM) since he studied the company in college. The VP has not followed the company as of late and would like you to prepare an update as to how IBM is doing over last three years and the top line outlook for next year. The VP would like you to use similar techniques that you have used in writing your previous reports.

Instructions

Using the financial statements of International Business Machines Corporation:

  1. Prepare an income statement vertical and horizontal analysis of International Business Machines Corporation using three years of data. Use Mergent Online to download income statement to Excel.

    importantBe sure to search for International Business Machines Corp, and choose the United States entity.
    FAQ for accessing and downloading income statements

  2. Using the line item descriptions from the income statement, create a new tab and identify which expenses (costs) are likely fixed, variable, product, and period costs.
  3. Using Mergent Online, create a ratio analysis report showing International Business Machines Corporation and its largest 4 competitors based on total revenue

    Download the following ratios and peer average into Excel. Format and arrange the data in a professional manner:

    1. Current Ratio
    2. Gross Margin
    3. Inventory % of TA
    4. Inventory Turnover
    5. Debt/Equity Ratio
    6. Net Current Assets % TA
    7. Net PPE % TA
    8. Net Profit Margin %
    9. Operating Margin %
    10. R + D % TR
    11. ROA %
    12. ROE %
    13. ROI %
    14. Selling and General Admin % TR
    15. Total Asset Turnover
  4. Using the historical income statement data, prepare a sales (revenue) forecast for the upcoming year including your assumptions, calculations, and rationale.
  5. Using the SEC.gov website, find articles on of International Business Machines Corporation and comment in a Word document on any recent accounting standards or ethical considerations that affect the company.
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