Q16E Preparing common-size income sta... [FREE SOLUTION]

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Chapter 15: Q16E (page 840)

Preparing common-size income statements
Refer to the data presented for Mulberry Designs, Inc. in Exercise E15-13.
Requirements
1. Prepare a comparative common-size income statement for Mulberry Designs,
Inc. using the 2018 and 2017 data. Round percentages to one-tenth percent (three
decimal places).
2. To an investor, how does 2018 compare with 2017? Explain your reasoning.

Short Answer

Expert verified

Answer

Give below
Total Expenses decreases in 2018 as compared to 2017

Step by step solution

Step 1- Preparation of Comparative common-size statement

Mulberry Designs, Inc

Common-size Income Statement

Years Ended December 31, 2018 and 2017

	2018 (in amount)	2018 (in %)	2017 (In amount)	2017 amount) (In %)
Net Sales Revenue	$431,000	100	$372,350	100
Expenses
Cost of Goods sold	203,850	47.3	186,000	50
Selling andAdministrative expenses	99,000	23	93,250	25
Other expenses	9,000	2.1	4,650	1.2
Total Expenses	311,850	72.4	283,900	76.2

Step 2:Working Note

For the purpose of calculation of common size income statement, take net sales of particular year as base to calculate percentage

Sales (2018) = ($431,000 /$431,000) x 100 = 100%

Cost of goods sold (2018) = ($203,850/$431,000) x 100 = 47.30%

Similar we calculate other values in form of percentage by taking net sales as base.

For year 2017, we will take net sales that is $372,350 as base for purpose of calculating the percentage values of related items

Sales (2017) = ($372,350/372,350) x 100 = 100%

Cost of goods sold (2017)= (186,000/372,350) x 100 = 50%

Similar we calculate other values in form of percentage by taking net sales as base.

Discuss

Requirement 2

Investors will compare on the basis of the percentage results of the two year 2018 and 2017. Net income has increase from 23.8% in 2017 to 27.6% in year 2018. Also in the year 2018, percentage of total expenses decreases from 76.2% in year 2017to 72.4% in year 2018. As in the both the years, percentage data is calculated by taking the base as net sales revenue. Common size income statement makes it easy for the investors to consider the percentage changes over the period of time for making proper comparisons of net income and total expenses incurred during the different period of time and helps to draw the broader view about the company's performance. Being an investor, the main consideration is net income of the company as compared to the other aspects for making decision about making investments in the company.

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	THE PADDLE COMPANY Comparative Financial Statements Years Ended December 31			RECREATIONAL LIFE VESTS Comparative Financial Statements Years Ended December 31
Income statement	2019	2018	2017	2019	2018	2017
Net sales revenue	\(430,489	\)425,410		\(410,570	\)383,870
Cost of goods sold	258,756	256,797		299,110	280,190
Gross profit	171,733	168,613		111,460	103,680
Operating expenses	153,880	151,922		78,290	70,830
Operating income	17,853	16,691		33,170	32,850
Interest expenses	865	788		2,780	2,980
Income before income tax	16,988	15,903		30,390	29,870
Income tax expenses	5,137	4,809		8,780	8,630
Net income	\(11,851	\)11,094		\(21,610	\)21,240
Balance sheet

Assets
Cash & Cash Equivalents	\(69,159	\)70,793		\(65,730	\)55,270
Accounts Receivable	44,798	44,452	\(44,104	39,810	38,650	\)36,460
Merchandise Inventory	79,919	66,341	76,363	68,500	65,230	59,930
Other Current Assets	15,494	16,264		24,450	37,630
Total Current Assets	209,370	197,850		198,490	196,780
Long-term Assets	89,834	90,776		116,760	116,270
Total Assets	\(299,204	\)288,626	\(276,482	\)315,250	$$313,050	\(310,640

Liabilities
Current Liabilities	\)69,554	\(60,232		\)90,810	\(90,010
Long-term Liabilities	31,682	29,936		96,310	105,890
Total Liabilities	101,236	90,168		187,120	195,900

Stockholders鈥� Equity
Common Stock	72,795	80,885		111,530	102,480
Retained Earnings	125,173	117,573		16,600	14,670
Total Stockholders鈥� Equity	197,968	198,458		128,130	117,150	103,840
Total Liabilities and Stockholder鈥檚 Equity	\)299,204	\(288,626		\)315,250	\(313,050

Other data
Market price per share	\)21.38	\(33.82		\)46.37	$51.64
Annual dividend per share	0.32	0.30		0.53	0.45
Weighted average number of shares outstanding	9,000	8,000		9,000	8,000

a. Current ratio	h. Profit margin ratio
b. Cash ratio	i. Asset turnover ratio
c. Inventory turnover	j. Rate of return on common stockholders鈥� equity
d. Accounts receivable turnover	k. Earnings per share
e. Gross profit percentage	l. Price/earnings ratio
f. Debt ratio	m. Dividend yield
g. Debt to equity ratio	n. Dividend payout

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017
Net sales revenue	\(461,000	\)424,000
Cost of goods sold	241,000	211,000
Gross profit	220,000	213,000
Operating expenses	137,000	135,000
Income from operations	83,000	78,000
Interest expenses	9,000	13,000
Income before taxes	74,000	65,000
Income tax expenses	18,000	24,000
Net income	\(56,000	\)41,000

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017	2016
Assets
Current assets
Cash	\(99,000	\)98,000
Accounts receivables, Net	108,000	114,000	107,000
Merchandise inventory	146,000	164,000	202,000
Prepaid expenses	20,000	9,000
Total current assets	373,000	385,000
Property, plant, and equipment	211,000	181,000
Total assets	\(584,000	\)566,000	\(602,000

Liabilities
Total current liabilities	\)227,000	\(246,000
Long-term liabilities	117,000	100,000
Total liabilities	344,000	346,000

Stockholder鈥檚 equity
Preferred stock, 3%	98,000	98,000
Common stockholder equity, no par	142,000	122,000	89,000
Total liabilities and stockholder鈥檚 equity	\)584,000	\(566,000

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Short Answer

Step by step solution

Step 1- Preparation of Comparative common-size statement

Step 2:Working Note

Discuss

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