Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Q16E

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 840

Short Answer

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.

Answer

  1. Give below

  2. Total Expenses decreases in 2018 as compared to 2017

See the step by step solution

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 and Administrative

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.

Step 3: 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.

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.