IV. Sean Mendoza, the president of Health Care Products Company, states that lar
ID: 2329161 • Letter: I
Question
IV. Sean Mendoza, the president of Health Care Products Company, states that large peso amounts on financial statements confuse him. However, he finds that the percentage relationships are helpful. For example, he expects cost of goods sold to be 60 percent of net sales, operating expenses to be 20 percent, income taxes to be 7 percent and a net income to be 10 percent. Operating results for 2016 and 2017 are given below in summary: 2016 2017 Net sales Cost of goods sold Gross Profit Operating Expenses Operating Income Income Taxes Net Income P 15,140,000 9,175,000 5,965,000 3,421,000 2,544,00 1,036,000 P1,508,00 P18,534,000 11,523,000 7,011,000 3,906,000 3,105,000 1,233,000 P 1,872,000 Required 1. Prepare the vertical analysis for both years. 2. Prepare horizontal analysis 3. Were the president's expectations realized? Should he worry about certain changes?Explanation / Answer
Requirement 1
Health care Products Company
Income statement for 2 years
Vertical Analysis
2016
2017
Total
%
Total
%
Net sales
P 15,140,000.00
100.00%
P 18,534,000.00
100.00%
Cost of Goods sold
P 9,175,000.00
60.60%
P 11,523,000.00
62.17%
Gross Profit
P 5,965,000.00
39.40%
P 7,011,000.00
37.83%
Operating Expenses
P 3,421,000.00
22.60%
P 3,906,000.00
21.07%
Operating Income
P 2,544,000.00
16.80%
P 3,105,000.00
16.75%
Income taxes
P 1,036,000.00
6.84%
P 1,233,000.00
6.65%
Net Income
P 1,508,000.00
9.96%
P 1,872,000.00
10.10%
Requirement 2
Health care Products Company
Income statement for 2 years
Horizontal Analysis
2017
2016
Increase or (decrease)
Total
Total
Amount
Increase %
Net sales
P 18,534,000.00
P 15,140,000.00
P 3,394,000.00
22.42%
Cost of Goods sold
P 11,523,000.00
P 9,175,000.00
P 2,348,000.00
25.59%
Gross Profit
P 7,011,000.00
P 5,965,000.00
P 1,046,000.00
17.54%
Operating Expenses
P 3,906,000.00
P 3,421,000.00
P 485,000.00
14.18%
Operating Income
P 3,105,000.00
P 2,544,000.00
P 561,000.00
22.05%
Income taxes
P 1,233,000.00
P 1,036,000.00
P 197,000.00
19.02%
Net Income
P 1,872,000.00
P 1,508,000.00
P 364,000.00
24.14%
Requirement 3
Presidents Expectation are partially realized such as net income is around 10% in both the years and Income tax expense is less than 7% in both the years. Although Cost of goods sold was expected to be 60% which is in fact a little higher in both years. Cost of Goods sold in year 2016 is 60.60% and in year 2017 Cost of goods sold is 62.17%. Operating expenses are also not upto the expectations. The real numbers are higher than expectations. Although net income is more than expected in year 2017.
President should be worried about certain changes like Increase in Cost of goods sold is higher than increase in net sales and Operating profit. There is nothing else to worry about because even though increase in Cost of goods is more than net sale, change in Net income has increased more than change in sales revenue.
Health care Products Company
Income statement for 2 years
Vertical Analysis
2016
2017
Total
%
Total
%
Net sales
P 15,140,000.00
100.00%
P 18,534,000.00
100.00%
Cost of Goods sold
P 9,175,000.00
60.60%
P 11,523,000.00
62.17%
Gross Profit
P 5,965,000.00
39.40%
P 7,011,000.00
37.83%
Operating Expenses
P 3,421,000.00
22.60%
P 3,906,000.00
21.07%
Operating Income
P 2,544,000.00
16.80%
P 3,105,000.00
16.75%
Income taxes
P 1,036,000.00
6.84%
P 1,233,000.00
6.65%
Net Income
P 1,508,000.00
9.96%
P 1,872,000.00
10.10%
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