Guidance for Preparing Forecasted and Comparative Income Statements

Q1. Prepare a forecasted income statement for Grant Ltd. for the fiscal year 2019, applying the given variances to each account.

Background

Topic: Forecasted Income Statement Preparation

This question tests your ability to apply percentage variances to income statement accounts and prepare a forecasted income statement for a future period. You must understand how to adjust prior year figures based on forecasted changes and present the results in a standard income statement format.

Key Terms and Formulas

• Sales, Sales Discounts, Sales Returns and Allowances: Increase by 6% ($\text{New Value} = \text{Old Value} \times 1.06$)

• Purchases, Purchases Discounts, Purchase Returns and Allowances: Increase by 2% ($\text{New Value} = \text{Old Value} \times 1.02$)

• Advertising Expense: Decrease by 21% ($\text{New Value} = \text{Old Value} \times 0.79$)

• Office Supplies Expense: Decrease by 5% ($\text{New Value} = \text{Old Value} \times 0.95$)

• All Other Expenses: Increase by 2% ($\text{New Value} = \text{Old Value} \times 1.02$)

• Merchandise Inventory (Ending): Estimated at $6,800.00

Step-by-Step Guidance

1. Gather the prior year (2018) income statement figures for each account (sales, purchases, expenses, etc.).

2. Apply the specified percentage variances to each account. For example, if sales in 2018 were $100,000, the forecasted sales for 2019 would be $100,000 \times 1.06$.

3. Calculate the forecasted cost of goods sold (COGS) using the formula:

   $\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$

4. Adjust each expense category according to the given variances (e.g., advertising expense reduced by 21%).

5. Set up the income statement format: Sales, less sales discounts and returns, less COGS, then list expenses, and finally calculate net income.

Try solving on your own before revealing the answer!

Q2. Prepare a comparative income statement for Grant Ltd. for the years 2017 and 2018 using horizontal analysis.

Background

Topic: Comparative Income Statement & Horizontal Analysis

This question tests your ability to compare financial results across two periods and analyze changes using horizontal analysis. You must understand how to calculate dollar and percentage changes for each account.

Key Terms and Formulas

• Horizontal Analysis: Measures the change in each account from one period to another.

• Dollar Change: $\text{Dollar Change} = \text{Current Year} - \text{Prior Year}$

• Percentage Change: $\text{Percentage Change} = \frac{\text{Dollar Change}}{\text{Prior Year}} \times 100$

Step-by-Step Guidance

1. Obtain the income statement figures for 2017 and 2018 for each account.

2. For each account, calculate the dollar change: $\text{Current Year} - \text{Prior Year}$.

3. Calculate the percentage change for each account: $\frac{\text{Dollar Change}}{\text{Prior Year}} \times 100$.

4. Present the results in a comparative income statement format, showing both years, dollar changes, and percentage changes.

Try solving on your own before revealing the answer!

Q3. Prepare a forecasted income statement for Arista Western Wear for the fiscal year 2019, applying the given variances to each account.

Background

Topic: Forecasted Income Statement Preparation

This question tests your ability to apply percentage variances to income statement accounts and prepare a forecasted income statement for a future period. You must understand how to adjust prior year figures based on forecasted changes and present the results in a standard income statement format.

Key Terms and Formulas

• Sales, Sales Discounts, Sales Returns and Allowances: Increase by 12% ($\text{New Value} = \text{Old Value} \times 1.12$)

• Purchases, Purchases Discounts, Purchase Returns and Allowances: Increase by 4% ($\text{New Value} = \text{Old Value} \times 1.04$)

• Advertising Expense: Decrease by 17% ($\text{New Value} = \text{Old Value} \times 0.83$)

• All Other Expenses: Increase by 6% ($\text{New Value} = \text{Old Value} \times 1.06$)

• Merchandise Inventory (Ending): Estimated at $7,400.00

Step-by-Step Guidance

1. Gather the prior year (2018) income statement figures for each account (sales, purchases, expenses, etc.).

2. Apply the specified percentage variances to each account. For example, if sales in 2018 were $100,000, the forecasted sales for 2019 would be $100,000 \times 1.12$.

3. Calculate the forecasted cost of goods sold (COGS) using the formula:

   $\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$

4. Adjust each expense category according to the given variances (e.g., advertising expense reduced by 17%).

5. Set up the income statement format: Sales, less sales discounts and returns, less COGS, then list expenses, and finally calculate net income.

Try solving on your own before revealing the answer!

Q4. Prepare a comparative income statement for Arista Western Wear for the years 2017 and 2018 using horizontal analysis.

Background

Topic: Comparative Income Statement & Horizontal Analysis

This question tests your ability to compare financial results across two periods and analyze changes using horizontal analysis. You must understand how to calculate dollar and percentage changes for each account.

Key Terms and Formulas

• Horizontal Analysis: Measures the change in each account from one period to another.

• Dollar Change: $\text{Dollar Change} = \text{Current Year} - \text{Prior Year}$

• Percentage Change: $\text{Percentage Change} = \frac{\text{Dollar Change}}{\text{Prior Year}} \times 100$

Step-by-Step Guidance

1. Obtain the income statement figures for 2017 and 2018 for each account.

2. For each account, calculate the dollar change: $\text{Current Year} - \text{Prior Year}$.

3. Calculate the percentage change for each account: $\frac{\text{Dollar Change}}{\text{Prior Year}} \times 100$.

4. Present the results in a comparative income statement format, showing both years, dollar changes, and percentage changes.

Try solving on your own before revealing the answer!