Question

Sales $ 471,000 $ 416,000 Cost of goods sold 330,000 268,000 Gross profit $ 141,000 $ 148,000 Operating expenses 130,000 116,000 Net income $ 11,000 $ 32,000 a. Prepare common size income statements for Price Company, a sole proprietorship, for the two years shown as above by converting the dollar amounts into percentages. For each year, sales will appear as 100 percent and other items will be expressed as a percentage of sales. (Income taxes are not involved as the business is not incorporated.) b. State whether the changes from year 1 to year 2 are favorable or unfavorable.

Answer 1

Requirement A

Price Company
Common size Income statement
	Year 1		Year 2
Sales	$ 471,000.00	100.00%	$ 416,000.00	100.00%
Cost of Goods Sold	$ 330,000.00	70.06%	$ 268,000.00	64.42%
Gross Profit	$ 141,000.00	29.94%	$ 148,000.00	35.58%
Operating Expenses	$ 130,000.00	27.60%	$ 116,000.00	27.88%
Net Income	$    11,000.00	2.34%	$    32,000.00	7.69%

Alternate solution with only 1 decimal place In Percentages

Price Company
Common size Income statement
	Year 1		Year 2
Sales	$ 471,000.00	100.0%	$ 416,000.00	100.0%
Cost of Goods Sold	$ 330,000.00	70.1%	$ 268,000.00	64.4%
Gross Profit	$ 141,000.00	29.9%	$ 148,000.00	35.6%
Operating Expenses	$ 130,000.00	27.6%	$ 116,000.00	27.9%
Net Income	$    11,000.00	2.3%	$    32,000.00	7.7%

Requirement B

Answer- Favorable

Net income percentage has increased from year 1 to 2.