Q16E - Horngren'S Financial And Managerial Accounting

Question

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.

Step-by-Step Solution

Answer

Answer

1. Give below

2. Total Expenses decreases in 2018 as compared to 2017

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.