Question

es for the income statement of Computer Tycoon Inc. for the year ended December 31, 2016.
Computer Tycoon, Inc.
Income Statements
For the Year Ended December 31
Change in
2016 2015 Dollars Percentage
Sales Revenue $108,000 $132,000 %
Cost of Goods Sold 64,000 74,700 %
Gross Profit 44,000 57,300 %
Selling, General, and Administrative
Expenses 36,800 38,600 %
Interest Expense 580 515 %
Income before Income Tax Expense 6,620 18,185 %
Income Tax Expense 1,500 5,800 %
Net Income $5,120 $12,385 %
According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016.
Required:
1. Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages for the income statement of Computer Tycoon Inc. for the year ended December 31, 2016.
2-A. Conduct a vertical analysis by expressing each line as a percentage of total revenues.
2-B. Excluding income tax, interest, and operating expenses, did Computer Tycoon earn more profit per dollar of sales in 2016 compared to 2015?
Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages for the income statement of Computer Tycoon Inc. for the year ended December 31, 2016.

Answer 1

Answer:

Computer Tycoon, Inc.

1. Horizontal Analysis, calculating the year-over-year changes in each line:

Computer Tycoon, Inc. Income Statements  For the Year Ended December 31    

                                                      2016         2015            Dollars      %

Sales Revenue                             $108,000  $132,000  -$24,000  -18.2%

Cost of Goods Sold                         64,000      74,700   -$10,700  -14.3%

Gross Profit                                      44,000     57,300   -$13,300  -23.2%

Selling, General, & Administrative

                         Expenses               36,800     38,600   -$1,800      -4.7%

Interest Expense                                  580           515     $65         +12.6%

Income before Income Tax Exp.      6,620       18,185  -$11,565     -63.6%

Income Tax Expense                         1,500       5,800   -$4,300     -74.1%

Net Income                                      $5,120    $12,385   -$7,265    -58.7%

2-A. Vertical analysis by expressing each line as a percentage of total revenues:

Computer Tycoon, Inc. Income Statements  For the Year Ended December 31    

                                                      2016            %             2015             %

Sales Revenue                             $108,000     100        $132,000    100

Cost of Goods Sold                         64,000      59             74,700     56.6

Gross Profit                                      44,000       41             57,300     43.4

Selling, General, & Administrative

                         Expenses               36,800       34           38,600       29.2

Interest Expense                                  580       0.5                515      0.4

Income before Income Tax Exp.      6,620        6              18,185      13.8

Income Tax Expense                         1,500       1.4             5,800       4.4

Net Income                                      $5,120       4.7         $12,385      9.4

2-B No. It made less profit per dollar of sales in 2016 compared to 2015.

Explanation:

a) Horizontal analysis is the analysis of financial statements to show changes in the amounts of corresponding financial statement items over a period of time.  It is used to evaluate the trend situations, using financial statements for two or more periods.

b) Vertical analysis is another technique for analyzing financial statements with each line item being listed as a percentage of a base figure within the statement.  For income statement, the base figure is usually the Sales Revenue, while for balance sheet, the base figure is the total assets.