For 20Y6, Blue Buffalo Company initiated a sales promotion campaign that include

Question

For 20Y6, Blue Buffalo Company initiated a sales promotion campaign that included the ex- penditure of an additional $60,000 for advertising. At the end of the year, Tamara Wasnuk, the president, is presented with the following condensed comparative income statement:

Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to net sales for each of the years.

1. BLUE BUFFALO COMPANY Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5 20Y6 20Y5 Amount Percent Amount Percent Sales $1,545,000    $1,224,000    Sales returns and allowances 45,000    24,000    Net sales $1,500,000    $1,200,000    Cost of goods sold 960,000    780,000    Gross profit $540,000    $420,000    Selling expenses $285,000    $216,000    Administrative expenses 90,000    96,000    Total operating expenses $375,000    $312,000    Income from operations $165,000    $108,000    Other income 36,000    36,000    Income before income tax $201,000    $144,000    Income tax expense (benefit) 42,000    28,800    Net income (loss) $159,000    $115,200   

Explanation / Answer

BLUE BUFFALO COMPANY

Comparative Income Statement

For the Years Ended December 31, 20Y6 and 20Y5

2016

Amount

2015

Amount

Vertical analysis states financial statements in a comparable common-size format (percentage form). One of the advantages of common-size analysis is that it can be used for inter-company comparison of enterprises with different sizes because all items are expressed as a percentage of some common number.

Particular

2016

Amount

%

2015

Amount

% Sales 1,545,000 1,224,000 Sales returns and allowances 45,000 24,000 Net sales 1,500,000 100% 1,200,000 100% Cost of goods sold 960,000 64 % 780,000 65% Gross profit 540,000 36% 420,000 35% Selling expenses 285,000 19% 216,000 18% Administrative expenses 90,000 6% 96,000 8% Total operating expenses 375,000 25% 312,000 26% Income from operations 165,000 11% 108,000 9% Other income 36,000 2.4% 36,000 3% Income before income tax 201,000 13.4% 144,000 12% Income tax expense (benefit) 42,000 2.5% 28,800 2.4% Net income (loss) 159,000 10.6% 115,200 9.6%

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