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

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.

Step-by-step 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

Answer 2

Step-by-step 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.