   Chapter 15.II, Problem 5TIE ### Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

#### Solutions

Chapter
Section ### Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447
Textbook Problem

# Prepare a vertical analysis of the income statement for Royal Equipment Supply, Inc., on page 499.

To determine

To calculate: The vertical analysis of an income statement for Royal Equipment Supply, Inc. for the year December 31,2016 if gross sales are $458,400, sales returns and allowances are$13,200, sales discount is $1,244, merchandise inventory for Jan,1,2016 is$198,700, merchandise inventory for Dec.31,2016 is $76,400, net purchases are$86,760, freight in is $875, salaries are$124,200, rent is $21,000, utilities are$1,780, advertising is $5,400, insurance is$2,340, administrative expense is $14,500, miscellaneous expenses are$6,000 and income tax is $17,335. Explanation Given Information: Royal Equipment Supply, Inc.’s gross sales are$458,400, sales returns and allowances are $13,200, sales discount is$1,244, merchandise inventory for Jan,1,2016 is $198,700, merchandise inventory for Dec.31,2016 is$76,400, net purchases are $86,760, freight in is$875, salaries are $124,200, rent is$21,000, utilities are $1,780, advertising is$5,400, insurance is $2,340, administrative expense is$14,500, miscellaneous expenses are $6,000 and income tax is$17,335.

Formula used:

Follow the steps to prepare a vertical analysis of an income statement:

Step 1: Use the percentage formula, Rate=Portion÷Base, to determine the rate of each item on the income statement. Net sales items are used as base and each items as portion.

Step 2: Round each answer to the nearest tenth of a percent.

Step 3: Count the percentage of each statement item in a column to the right of the amount.

Calculation:

Consider gross sales are $458,400, sales returns and allowances are$13,200, sales discount is $1,244, merchandise inventory for Jan,1,2016 is$198,700, merchandise inventory for Dec.31,2016 is $76,400, net purchases are$86,760, freight in is $875, salaries are$124,200, rent is $21,000, utilities are$1,780, advertising is $5,400, insurance is$2,340, administrative expense is $14,500, miscellaneous expenses are$6,000 and income tax is $17,335. Compute the net sales by substituting sales returns and allowances and sales discount and gross sales in the formula: Net sales=Gross salesSales returns and allowancessales discounts=458,40013,2001,244=$443,956

Compute percentage of gross sales by substituting gross sales and net sales in the formula:

%of Gross sales=Gross salesNet sales=$458,400$443,956=1.0330=103.30%

Similarly, calculate each income statement item and enter the results on the income statement by using the steps of vertical analysis;

And, percentage of net sales;

% of Net sales=Gross salesSales returns and allowances%sales discounts%=103.33.00.3=100%

Compute cost of goods sold by substituting merchandise inventory, net purchases, freight in to $875 and merchandise inventory for Dec.31,2016 in the formula: Costs of goods sold=198,700+86,760+87576,400=286,33576,400=$209,935

And, percentage of good sold is;

% of Costs of goods sold=44.8+19.5+0.217.2=64.517.2=47.3%

Compute gross margin by substituting net sales and cost of goods sold:

Gross Margin=Net SalesCost of goods sold=443,956209,935=\$234,021

And, percentage of gross margin is;

% of Gross Margin=Net Sales%Cost of goods sold%=10047.3=52

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