2. Prepare the vertical analysis of the income statement for the two years ended

Question

2. Prepare the vertical analysis of the income statement for the two years ended     December 31, 2017 and December 31, 2016. Use the Merchandise Operations     vertical analysis video as a guide to prepare the Anallysis. Submit using the Group Project 2     workpaper excel file.Tab Parts 1-2 3. From the projections does it appear that Hercules will do a better job controlling their     inventory? Why or Why Not? Include your computation of the inventory turnover     for 2017 and 2016 to support the rationale for your answer. Submit using the Group     Project 2 workpaper excel file.Tab Parts 3-4 Group Project 2 Instructions Q Search Sheet Home Insert Page Layout Formulas Data Review View -Insert Wrap Text General Delete , Paste 4-eT |+, Merge & Center, $, % , +00+00 Conditional Format Cell Sort & Format Formatting as Table Styles Syner D55 GROUP PROJECT 3 2 3 4 Your sister operates Hercules Parts Company, a mail order boat parts distibutorship that is in its third year of operations. The folowing is the single step income statement for the year ended December 31, 2018 Hercules Parts Incoma Sutomont Year Ended December 31, 2018 8 Revenues: 9 Not sales ravonua 10 Expenses: $ 600,000 Cost of goods sold Sales salaries expense Freight out expense (shipping charges) Advertising Expense Office salaries expense Office supplies eoxpenso Interest Expense S 420,000 38,850 S 20,000.00 $ 7,000.00 31,200 S 2,800.00 S 10,000.00 13 15 16 18 Total Expenses 19 Net Income 529,850 70,150 Your sister hed the following inventory belances: 21 22 23 24 38,000.00 44,000.00 18,000.00 /01/16 2/31/16 Proected inventory as of 12/31/17 26 Your sister is considering a proposal to increase net income by cNering their sales representatives 27 a salary commission on every unt thay sol. This should ha p increase sales They also will be able to 28 bargain for a better purchase price for their inventory, control their inventory more efficiently by adopting 29 juetin-time invontory and by shipping all merchandiee FOB Shipping Point. Prosontly, a merchandiso 30 s shipped FOB Destnation, (Assume that the interest expense wil remain the same in 2017) 31 32 it is estimated that moro creative marketing (in 2017) will enable Herculas to have a 20% increase in tho 33 Net Saies they had in 2016 by attracting new customers. 34 Assume the new shippng terms (in 2017) wil cause Heroues to have 15% decrease in the Net Sales they had in 2016. 36 Due to intense negotiation8 Hercules was able to reduce the cost of goods sold to 65% of Net Sales. 37 Assumo that Sales Salarios Expenso, Advertising Expense, Office Salarios Expanso and 38 Office Suppes Expense will all increase by 10%. 39 Assume that all sales reprosentativos w ill now receive a 5% oomssion on every saos dollar. 0 This will create a new expense that we will call Saes Commission Expense. 41 42 Required: 1.Prapare a projected multiple stop income statement for the year ondod 43 December 31, 2017. Submit using the Group Project 2 workpaper excel fils.Tab parts 1-2 Sheet1 Sheet2 Sheet3 + Ready 100%

Explanation / Answer

Projected multistep income statement 2017 and Vertical analysis of the income statement:

Revenue(1)

Answer for question no.3:

Cost of goods sold has decreased from 70% in 2016 to 65% in 2017 as a result ;Net profit has increased by 2.32% though there has been an increase in operating expenses by 2.68%. and sales has increased by a mere 2% in sales.

Also this is quiet clear from the inventory turnover ratio which is more in 2017 as below:

Particulars 2016 2017 Calculation Amount Vertical analysis 2016 Amount Vertical analysis 2017

Revenue(1)

600000 100.00% 612000 100.00% (600000*85%)*120% Minus: Cost of goods sold(2) 420000 70.00% 397800 65.00% 65%*612000 Gross profit(3)=(1)-(2) 180000 30.00% 214200 35.00% Minus: Operating expenses Sales salaries expense 38850 6.48% 42735 6.98% 38850*1110% Freight out expenses 20000 3.33% 0 0.00% As shipping policy has changed to FOB shipping point, no freght charges Advertising expenses 7000 1.17% 7700 1.26% 7000*110% Office salaries expenses 31200 5.20% 34320 5.61% 31200*110% Office supplies expenses 2800 0.47% 3080 0.50% 2800*110% Interest expense 10000 1.67% 10000 1.63% 10000 Sales commission 0.00% 30600 5.00% 5%*612000 Total expenses(4) 109850 18.31% 128435 20.99% Net profit(5)=(3)-(4) 70150 11.69% 85765 14.01%

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