Horizontal Analysis

A horizontal analysis involves looking across the rows on financial statements and calculating how the values have changed from year to year. Changes are expressed in both dollars and percentages. A horizontal analysis allows gives management the information they need to make decisions about a company by comparing figures with competing companies, looking at figures throughout the industry, or by analyzing their own data from one year to the next. This company's horizontal analysis analyzes years 6 through 7 and 7 through 8.

Income Statement

In years 6 and 7, the company's sales increased 33.3%. The benefit of the increased sales can be seen all the way across the financial statements. Even though most of the company's operating expenses rose approximately 30%, it was still able to achieve a 154.6% rise in operating income and ultimately a 313.4% rise in net income. In years 7 and 8, the company experienced a 15% drop in sales due to the stagnant economy. Conversely, the detriment of the decreased sales can be seen all the way across the financial statements. The company did a good job of reducing operating expenses in response to slow sales, but unfortunately operating income decreased 69.1% and net earnings decreased 81.6%.

Despite the decline in sales, the company's sales trends have remained consistent and are expected to remain consistent for the next three years. In years 7 and 8, the company scaled back its advertising budget by 16%. Competition Bikes should remain diligent in its efforts to reduce expenses, but may consider investigating the ongoing success of its word of mouth marketing. If word of mouth is still an effective method of advertising and sales are down strictly due to the economic situation, perhaps social media could be incorporated into the company's marketing plan as an affordable way to keep its products in front of its target audience.

Balance Sheet

Even though sales were down significantly, years 7 and 8 saw an increase in total assets by 16.5%. The 15% drop in accounts receivable in year 8 suggests that collection efforts with customers were successful. Competition Bikes greatly increased its cash and cash equivalents, perhaps in an attempt to pay down debt or to create a safety net in the case that sales projections fall flat. If it is found that word of mouth marketing is no longer working to the company's benefit, management may consider using some of the company's excess cash in the advertising budget for years 8 and 9.

Management can be commended for reducing transportation costs by 15%, freezing executive compensation, reducing open accounts in receivables by 15%, and scaling back research and development costs in years 7 and 8. However, general and administrative expenses rose nearly 8%. This is an area in which management could easily work on expense control as it often includes items such as office supplies. Short term investments have remained consistent in years 6, 7 and 8. Accounts payable decreased significantly in years 7 and 8, and the company has kept its salaries reasonable. Long term liabilities have remained consistent.

Due to the increase in sales, raw materials increased between years 6 and 7, but remained consistent in years 7 and 8. Property and equipment remained consistent. This is probably because Competition Bikes did not expand its operations. Management can be commended for this as the slow sales indicate that expanding would not help operations.

Vertical Analysis

Unlike a horizontal analysis, a vertical analysis moves down a financial statement and compares accounts in the same year. A vertical analysis is useful because it is expressed in percentages and can be used to compare companies that are different sizes side by side by preventing dollar value bias. A vertical analysis can give you a bigger financial picture of a company because its percentages are calculated based on the company's total assets.

Income Statement

Overall, the company has made