Question

Answer question 2 and 3 ty （2. vertical analysis 3. simple explaination）

Chapter 16 Homework Problem erkitch Company's condensed comparative income statements and comparative balance sheets for 2016 and 2015 follow Merkitch Company Comparative Income Statements For the Years Ended December 31, 2016 and 2015 2016 2015 Net sales Cost of goods sold Gross profit Operating expenses $3,276,800 2,088,800 $1,188,000 $3,146,400 2,008,400 $1,138,000 $518,000 423,200 $924,000$941,200 $196,800 39,200 $157,600 56,800 100,800 $2.52 $476,800 447,200 Selling expenses Administrative expenses Total operating expenses Net operating income Interest expense Income before income taxes Income taxes expense Net income $264,000 $198,400 62,400 $136,000 $ 3.40 Earnings per share Merkitch Company Comparative Balance Sheets As of December 31, 2016 and 2015 2016 2015 Assets $40,800 229,200 594,800 720,000 $1,641,600 $1,584,800 $81,200 235,600 574,800 750,000 Accounts receivable (net Invento Property, plant & equipment (net) Total assets Liabilities & Stockholders' Equit Accounts payable Notes payable (short-term) Bonds payable Common stock, $10 par value Retained earnings Total liabilities & stockholders' equity $267,600 200,000 400,000 400,000 374,000 477.200 400,000 400,000 307,600 $1,641,600 $1,584,800 Prepare schedules showing the amount and percentage changes from 2015 to 2016 for the comparative income statements and the balance sheets (horizontal analysis). (Round to one decimal place.) Prepare common-size income statements and balance sheets for 2015 and 2016 (vertical analysis). (Round to one decimal place.) Comment on the results in #1 and #2 by identifying favorable and unfavorable changes in the components and composition of the statements. 1. 2. 3,

Answer 1

(2).

(3).

As we see the results of common size income statement then we find out that as the volume of sale revenues increased then gross profit and net income have been also increased that is why there is positive impact of an increase in sale revenues on gross profit and net income.

Apart from this we also see that there are more operational efficiencies because cost of goods sold also have been decreased, selling expenses also have been decreased in percentages form in compare to sales revenues.

But there are some negative impacts also;

Administrative expenses have been increased, interest expenses increased, income tax expenses also have been increased that is why these items affecting negatively.

As we see results of common size balance sheet then we see followings impacts;

1. In 2016, liquidity of the this firm have been improved positively.

2. In 2016 balance of accounts receivables have been decreased which shows better position because now this firm need less quantum of credit sales.

3. In 2016, this firm required less quantity of inventory which is a positive result because it will free up some funds for the firm.

4. Level of accounts payable have been decreased which means this firm is not able to convice their suppliers. Or it may be that this firm does not need short-term financing from the suppliers. Balance of short-term notes payable also have been decreased whereas long term bonds payable have been increased which means that this firm is raising most of the debt funds from long-term sources.

5. Balance of common stock have been decreased which means that this firm is less rely on the own funds in compare to debts funds. But this firm is employing more own profits for the financing purposes etc.