Log out Go to App
Go to App

Learning Materials

Features

Discover

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%.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Determining the effects of business transactions on selected ratios

Financial statement data of Modern Traveler’s Magazine include the following items:

Cash

\(19,000

Accounts Receivable, Net

82,000

Merchandise Inventory

183,000

Total Assets

638,000

Accounts Payable

102,000

Accrued Liabilities

35,000

Short-term Notes Payable

50,000

Long-term Liabilities

221,000

Net Income

69,000

Common Shares Outstanding

50,000 shares

Requirements

  1. Compute Modern Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:

Current ratio

Debt ratio

Earnings per share

2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.

a. Purchased merchandise inventory of \)42,000 on account.

b. Borrowed \(121,000 on a long-term note payable.

c. Issued 5,000 shares of common stock, receiving cash of \)103,000.

d. Received cash on account, $5,000.

Briefly describe the ratios that can be used to evaluate a company’s ability to sell merchandise inventory and collect receivables.

Explaining financial statements

Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?

Computing inventory, gross profit, and receivables ratios

Requirements

1. Compute the inventory turnover, days’ sales in inventory, and gross profit

percentage for Accel’s Companies for 2018.

2. Compute days’ sales in receivables during 2018. Round intermediate calculations to

three decimal places. Assume all sales were on account.

3. What do these ratios say about Accel’s Companies’ ability to sell inventory and

collect receivables?

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?

2. Under what condition would the reclassification of the receivables be ethical? Unethical?
See all solutions

Recommended explanations on Business Studies Textbooks

Managerial Economics

Read Explanation

Strategic Analysis

Read Explanation

Change Management

Read Explanation

Financial Performance

Read Explanation

Influences On Business

Read Explanation

Organizational Behavior

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free