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Chapter 15: Q13E (page 839)

Data for Mulberry Designs, Inc. follow:


Requirements

1. Prepare a horizontal analysis of the comparative income statement of Mulberry

Designs, Inc. Round percentage changes to one decimal place.

2. Why did 2018 net income increase by a higher percentage than net sales

revenue?

Short Answer

Expert verified

Answer

  1. Given below

  2. Net Income Increase by higher percentage than net revenue because total expenses increase at lower rate of 9.85% compare to increase in net revenue of 15.75%.

Step by step solution

01

Analysis Table


2018

($) (a)

2017

($)(b)

Amount($)

Increase/ Decrease (c) = (a-b)

Percentage

% (c/b)

Net Sales Revenue

431,000

372,350

58,650

15.75%

Expenses:





Cost of Goods Sold

203,850

186,000

17,850

9.6%

Selling and Administrative Expenses

99,000

93,250

5,750

6.17%

Other Expenses

9,000

4,650

4,350

93.55%

Total Expenses

311,850

283,900

27,950

9.85%






Net Income

119,150

88,450

30,700

34.71%

02

Calculation

Net Income is made by two variables

Net Income = Sales Revenue - Total Expenses

So if sales revenue did not increase much, the other reason is that total expenses increased even less than the increase in sales. Due to this the Net Income went up.

The numbers in part 1 above are a proof. The total net income increased by 34.71% whereas sales just increased by 15.8%. If you see the Total Expenses, the increase is much less than increase in sales, which is less than 10%.

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Most popular questions from this chapter

Data for Research Enterprises follows:

2019

2018

2017

Total current assets

\(490,000

\)320,000

\(230,000

Total current liabilities

\)235,000

\(160,000

\)115,000

Compute the dollar amount of change and the percentage of change in Research Enterprises鈥� working capital each year during 2019 and 2018. What do the calculated changes indicate?

Theta Designs, Inc. has the following data:

Theta Designs INC
Vertical Analysis
For the year ended December 31, 2017, and 2018

Assets

2018 (\()

2017 (\))

Total current assets

25,000

73,440

Property, Plant and Equipment, Net

153,600

168,300

Other Assets

21,400

64,260

Total Assets

200,000

306,000

Liabilities

Total current liabilities

27,600

49,266

Long term debt

72,400

208,998

Total Liabilities

100,000

258,264

Stockholders鈥� Equity

Total stockholders鈥� Equity

100,000

47,736

Total liabilities and stockholders鈥� equity

200,000

306,000

Perform a vertical analysis of Theta Designs鈥檚 balance sheet for each year.

Evaluating current ratio

Requirements

1. Compute Accel鈥檚 Companies鈥� current ratio at May 31, 2018 and 2017.

2. Did Accel鈥檚 Companies鈥� current ratio improve, deteriorate, or hold steady during 2018?

Ross鈥檚 Lipstick Company鈥檚 long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders鈥� equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company鈥檚 lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross鈥檚 management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management鈥檚 intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term鈥攁 current asset. On the controller鈥檚 recommendation, Ross鈥檚 board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross鈥檚 true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross鈥檚 management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Question: What is vertical analysis? What item is used as the base for the income statement? What item is used as the base for the balance sheet?
See all solutions

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