Q13E - Horngren'S Financial And Managerial Accounting

Question

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?

Step-by-Step Solution

Answer

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 1: 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%

Step 2: 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%.