Question

For 2016, Indigo Company initiated a sales promotion campaign that included the expenditure of an additional $39,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement:

Indigo Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1		2016	2015
2	Sales	$890,000.00	$600,000.00
3	Cost of goods sold	320,400.00	228,000.00
4	Gross profit	$569,600.00	$372,000.00
5	Selling expenses	$142,400.00	$84,000.00
6	Administrative expenses	62,300.00	54,000.00
7	Total operating expenses	$204,700.00	$138,000.00
8	Income from operations	$364,900.00	$234,000.00
9	Other income	80,100.00	54,000.00
10	Income before income tax	$445,000.00	$288,000.00
11	Income tax expense	231,400.00	156,000.00
12	Net income	$213,600.00	$132,000.00

	Required:
1.	Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. Round your percentages to one decimal place. Enter all amounts as positive numbers.
2.	To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1). 1. Prepare an income statement in comparative form, stating each item for both years as a percent of sales. Round your percentages to one decimal place. Enter all amounts as positive numbers. Indigo Company Comparative Income Statement For the Years Ended December 31, 2016 and 2015 1 2016 2016 2015 2015 2 Amount Percent Amount Percent 3 Sales $890,000.00 $600,000.00 4 Cost of goods sold 320,400.00 228,000.00 5 Gross profit $569,600.00 $372,000.00 6 Selling expenses $142,400.00 $84,000.00 7 Administrative expenses 62,300.00 54,000.00 8 Total operating expenses $204,700.00 $138,000.00 9 Income from operations $364,900.00 $234,000.00 10 Other income 80,100.00 54,000.00 11 Income before income tax $445,000.00 $288,000.00 12 Income tax expense 231,400.00 156,000.00 13 Net income $213,600.00 $132,000.00

Answer 1

Answer

• All working forms part of the answer
• Amounts are in $
• Percentage is calculated on ‘Sales’ figure as asked

Indigo Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1		2016		2015
2		Amount ($)	Percent	Amount ($)	Percent
3	Sales	890000	100.00%	600000	100.00%
4	Cost of goods sold	320400	36.00%	228000	38.00%
5	Gross profit	569600	64.00%	372000	62.00%
6	Selling expenses	142400	16.00%	84000	14.00%
7	Administrative expenses	62300	7.00%	54000	9.00%
8	Total operating expenses	204700	23.00%	138000	23.00%
9	Income from operations	364900	41.00%	234000	39.00%
10	Other income	80100	9.00%	54000	9.00%
11	Income before income tax	445000	50.00%	288000	48.00%
12	Income tax expense	231400	26.00%	156000	26.00%
13	Net income	$213600	24.00%	$132000	22.00%

• Cost of goods sold % has decreased which means in 2015, the pressure or part of fixed cost in COGS was more.
• There has been extra expenses incurred as selling expenses compared to 2015.
• Other Income % has stayed the same.
• Company has profited more. 48% increase in sales has lead to 62% increase in Net Income.