3) I shared with you a Horizontal Analysis of the Digital Turbine Income Statement which you can use for a sample.
A horizontal analysis is the analysis of financial data over time. Comparing data over two or more consecutive periods assists in analyzing trends in company performance and predicting future performance. There are 2 ways to do this:
⦁ Compare the veritical analysis over time. Looking for changes year over year once the balance sheet or income statement is expressed in percentage terms allows us to look for trends or changes year over year. This helps to point out areas for further research to better understand unusual or concerning trends.
⦁ Compute the percentage change for each line item as follows: (current balance – previous balance)/previous balance. By closely analyzing this, we can monitor if the company’s performance is improving or declining.
The horizontal analysis is really good at helping spot trends over time. This allows us to take a closer look to better understand the implications these changes may have, good or bad.
Attached is a horizontal analysis that I completed of Digital Turbine Inc’s Income Statement which they call a Consolidated Statement of Operations. This compares 2020 first quarter versus 2019 first quarter results. Digital Turbine helps mobile operators to monetize their devices.
Analysis from above Horizontal Income Statement:
There are several learnings from this statement.
– Net revenue was up significantly, and while the cost of revenue also increased, they were lower when compared to the increase in net revenue. This drove a high increase to the gross profit, signally improvement.
-Operating expenses increased, but were much smaller than the increases to income from Operations, which was up 249%. It would be interesting to watch the Product Development and Marketing expenses. These expenses can help net future growth, so they may be playing too safe here.
– I think it will be important to watch the interest income. It’s negative, indicating they’re paying more interest on debt than they’re receiving on their investments. This is something to note and watch closely.
– Overall, there is a nice increase in net income and very favorable changes. However, there are a few items to take note of and watch closely for the future.
4) I shared with you the solution for E2-33 which included a common-size Income Statement.
Please attempt E2-33 on page 2-31.
You are being asked to create a common-size Income Statement and Balance Sheet.
Solution: Attached is a solution spreadsheet I created for E2-33.
This example will be helpful for Case Study 2
6) You MUST use the ratio formulas provided in Exhibit 4.4 on pages 4-13 and 4-14 of our textbook so we have a common frame of reference. Some textbooks and websites will utilize different variations of the ratios.
Ratio Formulas:
11) I asked you to attempt P4-53 which is a ratio problem. Helpful for Case Study 2.(please see question and solution for reference)
Solution: Use for reference calculate in the same way as below
Attached is the solution spreadsheet I created for Problem P4-53. Please note how I first calculated the accounts receivable turnover, inventory turnover, and accounts payable turnover before proceeding to calculate the DSO, DIO, and DPO.
Speaking in general terms, we always want a lower DSO, lower DIO, and higher DPO. Ultimately, a negative cash conversion cycle is better.
Please see my Announcement in which I shared how to calculate averages for any account since you will need to do so for multiple ratios for Case Study 2.
This problem gave you the averages.
12) I will ask you to attempt M5-21 to help with the Accounts Receivable turnover ratio & Days Sales Outstanding (DSO) and M6-15 to help with the inventory turnover ratio.
Please attempt M5-21 . You are being asked to calculate the Accounts Receivable turnover and DSO for The Procter & Gamble Company and Colgate-Palmolive Company.
M5-21:
Solution:
Attached is a solution spreadsheet I created for M5-21.
Please note that we need to use both years Accounts Receivable (AR) figures to calculate the average.
There is a simple way to calculate the DSO. Once you have calculated the Accounts Receivable turnover, you can just divide 365 by the Accounts Receivable turnover to get the DSO.
We prefer a higher AR turnover and lower DSO since this means we are turning receivables into Cash faster.
M6-15:
Attached is the solution to M6-15. This is an inventory turnover problem. You need to average the inventory in the denominator of your formula by adding the 2018 inventory plus the 2017 inventory and dividing by 2.
Calculating the Days Inventory Outstanding (DIO) was not required, but I calculated it as a bonus.
Retailers can improve inventory turnover by lowering the amount of inventory they carry or by offering more discounted merchandise.
PriceSmart has the higher inventory turnover since they offer lower-priced merchandise so they rely on volume to drive their business.