Question

E13-3 Preparing and Interpreting a Schedule for Horizontal and Vertical Analyses (LO 13-2, LO 13-3, LO 13-5) According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Required: 1. Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages for the income statement of Computer Tycoon Inc. for the year ended December 31, 2016. 2-a. Conduct a vertical analysis by expressing each line as a percentage of total revenues. 2-b. Excluding income tax, interest, and operating expenses, did Computer Tycoon earn more profit per dollar of sales in 2016 compared to 2015?

Answer 1

1	Comparative Income statement
		2016	2015	Difference - Amount	Difference - Percent
		(i)	(ii)	(iii) = (i) - (ii)	(iii) / (ii)
	Sales	$ 1,07,000	$ 1,30,500	$                        -23,500	-18.0%
	Cost of goods sold	$     63,500	$     74,300	$                        -10,800	-14.5%
	Gross Profit	$     43,500	$     56,200	$                        -12,700	-22.6%
	Selling, general and Administrative expenses	$     36,700	$     38,400	$                           -1,700	-4.4%
	Interest expense	$           570	$           510	$                                  60	11.8%
	Income before Income tax	$       6,230	$     17,290	$                        -11,060	-64.0%
	Income tax expense	$       1,500	$       5,700	$                           -4,200	-73.7%
	Net Income	$       4,730	$     11,590	$                           -6,860	-59.2%
	Comparative Income statement
2		2016		2015
		(i)	(i) / $107000	(ii)	(ii) / $130500
	Sales	$ 1,07,000	100.0%	$                      1,30,500	100.0%
	Cost of goods sold	$     63,500	59.3%	$                          74,300	56.9%
	Gross Profit	$     43,500	40.7%	$                          56,200	43.1%
	Selling, general and Administrative expenses	$     36,700	34.3%	$                          38,400	29.4%
	Interest expense	$           570	0.5%	$                                510	0.4%
	Income before Income tax	$       6,230	5.8%	$                          17,290	13.2%
	Income tax expense	$       1,500	1.4%	$                            5,700	4.4%
	Net Income	$       4,730	4.4%	$                          11,590	8.9%
3	No