Review Case 12.21 in your textbook. Share your observations and recommendations for the company based on the data provided.

reported on these statements, however, it is helpful to look at the changes in the account b ances over time. This type of analysis is called horizontal analysis. Preparing a Horizontal Analysis The first step in preparing a horizontal analysis of a firm's financial statements is to gather the financial statements for at least two years. To prepare the analysis, calculate the differ- ence between the current year's balance and the previous year's balance in each account. Then present these dollar differences in horizontal statements like those in Exhibits 12.1 and 12.2, which show a horizontal analysis of C&C Sports' balance sheet and income statement. Let's review the calculations for C&C's Cash account. The dollar change from 2019 to 2020 was a decrease of $29,021 ($7,752 - $36,773). B C D E EXHIBIT 12.1 C&C SPORTS C&C Sports' balance sh horizontal analysis. Balance Sheet Horizontal Analysis w Dec. 31, 2020 Dec. 31, 2019 $ Change % Change 6 Cash 7,752 S 36,773 (29,021) (78.9%) 7 Accounts receivable, net 578,639 540,462 38,177 7.1% 8 Total inventories 923,930 792,142 131,788 16.6% 9 Prepaid expenses 24,388 8,165 16,223 198.7% 10 Total current assets 1,534,709 1,377,542 157,167 11.4% 11 Machinery and equipment, net 365,335 491,607 (126,272) (25.7%) 12 Other assets 29,937 33,707 (3,770) (11.2%) 13 Total assets $ 1,929,981 $ 1,902,856 $ 27,125 1.4% 14 15 Accounts payable S 441,602 $ 487,912 $ (46,310) (9.5%) 16 Accrued liabilities 84,642 168,319 (83,677) (49.7%) 17 Short-term debt 125,000 110,000 15,000 13.6% 18 Current maturities of long-term debt 40,000 40,000 0.0% 19 Total current liabilities 591,244 806,231 (114,987) (14.3%) 20 Long-term debt 410,000 450,000 (40,000) (8.9%) 21 Total liabilities 1,101,244 1,256,231 (154,987) (12.3%) 22 23 Common stock 250,000 250,000 0.0% 24 Retained earnings 578,737 396,625 182,112 45.9% 25 Total stockholders' equity 828,737 646,625 182,112 28.2% 26 Total liabilities and stockholders equity $ 1,929,981 $ 1,902,856 $ 27,125 1.4% 12-4 CHAPTER 12 Financial Statement Analysis EXHIBIT 12.2 C&C Spor590 of 690 12-4 CHAPTER 12 Financial Statement Analysis EXHIBIT 12.2 A B D C&C Sports' income statement C&C SPORTS horizontal analysis. Income Statement w Horizontal Analysis Dec. 31, 2020 Dec. 31, 2019 $ Change % Change 6 Sales 7,855,000 $ 7,015,000 $ 840,000 12.0% 7 Cost of goods sold 5,817,590 5,215,000 602,590 11.6% 8 Gross profit " 2,037,410 1,800,000 237,410 13.2% 9 Selling and administrative expenses 1,735,539 1,570,689 164,850 10.5% 10 Operating income 301,871 229,311 72,560 31.6% 11 Interest expense 41,711 43,210 (1,499) (3.5% 12 Income before taxes 260,160 186,101 74,059 39.8% 13 Tax expense (30%) 78,048 55,830 22,218 39.8% 14 Net income 182,112 $ 130,271 $ 51,841 39.8% Because an absolute dollar change doesn't give the whole picture, a percentage change is often included in the analysis. This percentage change, which expresses the dollar change relative to the previous year's balance, is calculated as follows: Current year account balance - Previous year account balance Previous year account balance WATCH OUT! The percentage change calculation for C&C's Cash balance: from 2019 to 2020 reveals a 78.9% Refer to Exhibits 12.1 decrease in Cash, as follows: and 12.2. Note that the percentage change columns do not add up in the same $7,752 - $36,773 2= (78.9%) way as the dollar columns. $36,773 That is because each of the percentages was calculated using a different Similar calculations should be made for each line on the balance sheet and income statement denominator. (See Watch Out!). Interpreting a Horizontal Analysis The calculations are the easy part of a horizontal analysis. The challenge is to interpret the results and develop an understanding of what has happened over the period. Let's examine C&C's numbers to see what story they tell. In looking at C&C's balance sheet (Exhibit 12.1), the first thing that jumps out is the change in cash: The company has seen its cash balance drop almost 79% in one year. Recall from the beginning of the chapter that George Douglas noticed the same thing. What might have caused this significant decrease? The best way to discover what happened to cash is to study the Statement of Cash Flows, shown in Exhibit T1.5 on page TF1-5. From the Statement of Cash Flows we see that, although C&C's net income has increased every year, the company can't generate enough cash to cover operations, Accounts Receivable and Inventory are grow- ing (7.1% and 16.6%, respectively). Although the accounts are part of the normal cash cycle, when they grow, management needs to make sure that inventory and receivables are being converted to cash in a timely manner. Another contributor to the cash decrease is the repay- ment of $40,000 per year in long-term debt. Referring back to the assets portion of Exhibit 12.1, you can see that Prepaid Expenses increased a hefty 198.7%. While the dollar increase isn't large, it does contribute to C&C's cash