ASSIGNMENT 20(FINANCIAL ACCOUNTING)

BY
M.MANSOOR
19U00063
EX 17-1
A.

Innovation Quarter Inc.

Income Statement

For the Years Ended

Current Year Previous Year

Sales 4000000 100% 3600000 100%

Cost of goods sold 2280000 57% 1872000 52%

Gross profit 1720000 43% 1728000 48%

Expenses:

Selling expenses 600000 15% 648000 18%

Administrative expenses 520000 13% 360000 10%

Total expenses 1120000 28% 1008000 28%

Income from operations 600000 15% 720000 20%

Income tax expense 240000 6% 216000 6%

Net income 360000 9% 504000 14%

B.
The significant changes disclosed by the comparative statements are:

1. There has been an increase in the cost of goods sold from 52% in the previous year to 57% in
the current year, thereby resulting in a decrease in the gross profit from 48% to 43%.
2. Income from operations has decreased from 20% to 15%. This change is also on account of
the increase in cost of goods sold as the total expenses have remained unchanged over the two
years though there have been minor changes in the selling expenses and administrative expenses
year-on-year.

3. Net income has also decreased by 5% due to the increase in cost of goods sold by the same
percentage though the income tax expense for both years has remained unchanged at 6% of sales.

EX 17-5
A.

Current Year Previous Year

Particulars ($) ($) Increase or (Decrease)

**Percentage
*Amount ($) (%)

Sales $2,280,000.00 $2,000,000.00 $ 280,000.00 14.0

Cost of goods sold 1,960,000.00 1,750,000.00 210,000.00 12.0

Gross profit $320,000.00 $250,000.00 70,000.00 28.0

Selling expenses $156,500.00 $125,000.00 31,500.00 25.2

Administrative
expenses 122,000.00 100,000.00 22,000.00 22.0

Total operating
expenses $278,500.00 $225,000.00 53,500.00 23.7

Income before income

tax $41,500.00 $25,000.00 16,500.00 66.0

Income tax expense 16,600.00 10,000.00 6,600.00 66.0

Net income $24,900.00 $15,000.00 9,900.00 66.0

B.
The net income for Winthrop Company increased by 66 % this year. This increase was the
combined result of an increase in sales of 14% and lower percentage increase (12%) in cost of
goods sold.

The cost of goods sold increased at a slower rate than the increase in sales, thus causing the 28 %
increase in gross profit which is greater than the percentage increase in sales that is 14%.

EX 17-6

A.

CURRENT YEAR PREVIOUS YEAR

WORKING CAPITAL

CURRENT ASSETS 2070000 1600000

CURRENT RATIO

CURRENT ASSETS 2070000 1600000

RATIO

QUICK RATIO

CURRENT ASSETS 2070000 1600000

LESS: PREPAID EXPENSES 188100) 208000)

B.

THE LIQUIDITY HAS IMPROVED FROM PRECEEDING YEAR TO THE CURRENT

YEAR. The WORKING CAPITAL, CURRENT RATIO, QUICK RATIO HAVE ALL
INCREASED. MOST OF THESE CHANGES ARE THE RESULT OF AN INCREASE IN
CURRENT ASSETS RELATIVE TO CURRENT LIABILITIES.
EX 17-10

A.

Account receivable turnover = Merchandise sales / Average credit card receivable

Xavier Average credit card receivables = (820,000+880,000)/2 = $850,000
Lestrade     average receivables            = (600,000+710,000)/2 = $655,000
Xavier     = $8,500,000/ 850,000          = 10 times
Lestrade = 4,585,000/ 655,000           = 7 times
Number of days sales in receivable = 360/ accounts receivable turnover
Xavier = 360/10          = 36 days
Lestrade = 360/7         = 52 days

B.
Xaviers has a right credit policy because of which its sales in on lower side but we see that its
recovery period is good which shows that it does not give credit to everyone.

On the other hand, Lestrade's credit policy seems to be liberal so that it can increase sales but
we see that its recovery time is on higher side.