Question

Here are the comparative income statements of Georgia Development Corporation. GEORGIA DEVELOPMENT CORPORATION Condensed Income Statements For the Years Ended December 31 December 31, 2017 December 31, 2016 Net sales $600,000 $500,000 Cost of goods sold 414,000 350,000 Gross profit 186,000 150,000 Operating expenses 150,000 120,000 Net income $36,000 $30,000 Prepare a horizontal analysis of the income statement data for Georgia Development Corporation using 2016 as a base. (If amount and percentage are a decrease show the numbers as negative, e.g. -55,000, -12.1% or (55,000), (12.1%). Round percentages to 1 decimal place, e.g. 12.1%.)

Answer 1

Answer:

Explanation:

                                                                    Horizontal analysis

                        December31/14   December31/13 Amount Incre.   %incre.

                                                                               over base       over base

Net sales              600000         500000             100000            20.00%

Cost of goods sold414000         350000             64000              18.29%

Gross Profit              186000        150000             36000             24.00%

Operating Expensese 150000        120000            30000          25.00%

Net Income                 36000          30000              6000             20.00%

Looking at the table above you’ll notice that the company is showing a healthy growth in all the figures bott at the top line as well as bottom line. The percentage in gross profit has increased and even higher than the % net sales increase over last year. This clearly reveals that the company has enhanced its economy of scale. But this enhancement has been invalidated by the corresponding increase in the operating expenses %.

Vertical analysis           (having net sales as base)

Net sales                                100%      100%

Cost of goods sold                69.00%   70.00%

Gross Profit                            31.00%    30.00%

Operating Expenses              25.00%    24.00%

Net Income                             6.00%       6.00%

There is not much variation in vertical analysis. The companies performance here is stable as last year.

Answer 2

Answer:

There is an increase in the CGS if calculated based on 2016 figures which gives a reduced gross profit by 1% . But the operating expenses are also decreased by 1% which gives decreased Net income by 1% which is the same as the original income.

Explanation:

GEORGIA DEVELOPMENT CORPORATION

Condensed Income Statements  (Calculations for Base)

For the Years Ended

                             December 31, 2016     December 31, 2017   As Base

Net sales                        $500,000             $600,000             $600,000

Cost of goods sold         350,000                  414,000             420,000

Gross profit                      150,000                 186,000             180,000

Operating expenses          120,000              150,000              144,000

Net income                        $30,000                $36,000           $ 36,000

We calculate each amount based to  2016

CGS 2017= (CGS/ 2016 Sales)* 2017 Sales= 350,000/500,000) 600,000= $ 420,000

Operating expenses 2017= (Operating expenses 2016/ 2016 Sales)* 2017 Sales= 120,000/500,000) 600,000= $ 144,000

GEORGIA DEVELOPMENT CORPORATION

Condensed Income Statements Horizontal Analysis (figures)

For the Years Ended

                                 December 31, 2017       2016 As Base     Difference

Net sales                                $600,000             $600,000         -

Cost of goods sold                       414,000             420,000        6,000

Gross profit                                    186,000             180,000       (6000)

Operating expenses                     150,000              144,000        6000

Net income                                      $36,000           $ 36,000        NIL

GEORGIA DEVELOPMENT CORPORATION

Condensed Income Statements  Horizontal Analysis (Percentages)

For the Years Ended

                                 December 31, 2017       2016 As Base    % Difference

Net sales                                $600,000             $600,000         -

Cost of goods sold                       414,000             420,000         1%

Gross profit                                    186,000             180,000       ( 1%)

Operating expenses                     150,000              144,000          1%

Net income                                      $36,000           $ 36,000        NIL