Question

Revenue and expense data for Bluestem Company are as follows:

Year 2 Year 1

administrative expenses 37,720 20,300

COGS 360,000 319,900

Income tax 41,000 32,200

Sales 820,000 700,000

Selling expense 154,160 109,900

1) Required: (a) Prepare a comparative income statement, with vertical analysis, stating each item for both years as a percent of sales. Round your percentages to one decimal place. Enter all amounts as positive numbers. Refer to the Accounts and Amount Descriptions for correct wording of text entries. (b) Comment upon significant changes disclosed by the comparative income statement.

2) Comment upon significant changes disclosed by the comparative income statement.

There was an (increase/decrease) the cost of goods sold and a 1.7% (increase/decrease) in administrative expenses. However, the more significant of 3.1% in selling expenses offset the 1.8% (increase/decrease) in the cost of goods sold and contributed greatly to the 3.4% (increase/decrease) in net income.

Answer 1

Requirement (1) - Comparative Income statement, with vertical analysis

BLUESTEM COMPANY
Comparative Income Statements
	YEAR 2		YEAR 1
	Amount	Percent	Amount	Percent
Sales Revenue	820,000	100%	700,000	100%
Less : Cost of goods Sold	360,000	43.9%	319,900	45.7%
Gross Profit	460,000	56.1%	380,100	54.3%
Less : Operating Expenses
Selling Expenses	154,160	18.8%	109,900	15.7%
Administrative Expenses	37,720	4.6%	20,300	2.9%
Total	191,880	23.4%	130,200	18.6%
Income Before Income Tax	268,120	32.7%	249,900	35.7%
Less : Income Tax	41,000	5%	32,200	4.6%
Net Income	227,120	27.7%	217,700	31.1%

Requirement (2) - Comment on significant changes disclosed by the comparative income statement

There was an “decrease” in the cost of goods sold and a 1.7% “increase” in administrative expenses. However, the more significant of 3.1% in selling expenses offset the 1.8% “decrease” in the cost of goods sold and contributed greatly to the 3.4% “decrease” in net income.