Warren SM_Ch.17_final_short

# Warren SM_Ch.17_final_short - CHAPTER 17 FINANCIAL...

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CHAPTER 17 FINANCIAL STATEMENT ANALYSIS EXERCISES Ex. 17–1 a. ROGAN TECHNOLOGIES CO. Comparative Income Statement For the Years Ended December 31, 2010 and 2009 2010 2009 Amount Percent Amount Percent Sales. ............................................ \$500,000 100.0% \$440,000 100.0% Cost of goods sold. .................... 325,000 65 .0 242,000 55 .0 Gross profit. ................................ \$175,000 35 .0 % \$198,000 45 .0 % Selling expenses. ....................... \$ 70,000 14.0% \$ 79,200 18.0% Administrative operating expenses. ............................... 75,000 15 .0 70,400 16 .0 Total expenses. ........................... \$145,000 29 .0 % \$149,600 34 .0 % Income from operations. ........... \$ 30,000 6.0% \$ 48,400 11.0% Income tax expense. .................. 25,000 5 .0 26,400 6 .0 Net income. ................................. \$ 5,000 1 .0 % \$ 22,000 5 .0 % b. The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 10 percentage points (65.0% – 55.0%), while selling expenses de- creased by 4 percentage points (14% – 18%), administrative expenses de- creased by 1% (15% – 16%), and Income Tax Expense decreased by 1 percent- age point (5% – 6%). Thus, net income as a percent of sales dropped by 4% (4% + 1% + 1% – 10%). 1

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Ex. 17–3 a. SORENSON ELECTRONICS COMPANY Common-Sized Income Statement For the Year Ended December 31, 20— Sorenson Electronics Electronics Industry Company Average Amount Percent Sales. ................................................................. \$ 2,050,000 102.5% 102.5% Sales returns and allowances. ........................ 50,000 2 .5 2 .5 Net sales. ........................................................... \$ 2,000,000 100.0% 100.0% Cost of goods sold. .......................................... 1,100,000 55 .0 61 .0 Gross profit. ...................................................... \$ 900,000 45 .0 % 39 .0 % Selling expenses. ............................................. \$ 560,000 28.0% 23.0% Administrative expenses. ................................ 220,000 11 .0 10 .0 Total operating expenses. ............................... \$ 780,000 39 .0 % 33 .0 % Operating income. ............................................ \$ 120,000 6.0% 6.0% Other income. ................................................... 44,000 2 .2 2 .2 \$ 164,000 8.2% 8.2% Other expense. ................................................. 20,000 1 .0 1 .0 Income before income tax. .............................. \$ 144,000 7.2% 7.2% Income tax expense. ........................................ 60,000 3 .0 5 .0 Net income. ....................................................... \$ 84,000 4 .2 % 2 .2 % b. The cost of goods sold is 6 percentage points lower than the industry average, but the selling expenses and administrative expenses are five percentage points and 1 percentage point higher than the industry average. The combined impact is for net income as a percent of sales to be 2 percentage points better than the industry average. Apparently, the company is managing the cost of manufactur-
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Warren SM_Ch.17_final_short - CHAPTER 17 FINANCIAL...

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