Assignment on Management Accounting (solution)
Added on 2020-05-16
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MANAGEMENT ACCOUNTING1
Horizontal analysis of the balance sheets and income statements for Great Oaks FurnitureGreat Oaks FurnitureDecember 31,Balance Sheet20122011Change Percent Assets Change Current assetsCash 41,200 53,000 -11,800 -22.26 Accounts receivable 5,70,000 4,43,000 1,27,000 28.67 Inventory 50,70,000 48,41,000 2,29,000 4.73 Prepaid expenses 83,800 78,000 5,800 7.44 Total current assets 57,65,000 54,15,000 3,50,000 6.46 Building and equipment, net 10,97,000 10,95,000 2,000 0.18 Total assets 68,62,000 65,10,000 3,52,000 5.41 Liabilities and stockholders’ equityCurrent liabilitiesAccounts payable 6,04,000 6,24,000 -20,000 -3.21 Bank loan payable 6,79,000 6,25,000 54,000 8.64 Other accrued payables 2,13,000 3,13,000 -1,00,000 -31.95 Total current liabilities 14,96,000 15,62,000 -66,000 -4.23 Long-term debt 17,29,000 17,97,000 -68,000 -3.78 Total liabilities 32,25,000 33,59,000 -1,34,000 -3.99 Stockholders’ equityCommon stock 13,59,000 13,59,000 - - 2
Retained earnings 22,78,000 17,92,000 4,86,000 27.12 Total stockholders’ equity 36,37,000 31,51,000 4,86,000 15.42 Total liabilities and stockholders’ equity 68,62,000 65,10,000 3,52,000 5.41 From the above analysis we can see that there have been major changes in cash, accountsrelievable, other accrued payables, retained earnings and total equity.There has been a decline in cash and increase in accounts receivable. This may be explainedif the company has increased its credit sales and declined its cash sales, because of which thecash has declined and trade receivables have increased. Since both the items belong to thecurrent asset group, due to opposite movements there is no major change at the current assettotal level. Also, we see that total outstanding payables have increased; this may be due toshortage of cash. There has been major increase in retained earnings due to profits and maybe due to changes in reserves.3
Year EndedGreat Oaks FurnitureDecember 31,Change Percent Statement of Earnings20122011 Change Net sales 55,68,000 52,53,000 3,15,000 6.00 Cost of goods sold 28,40,000 26,27,000 2,13,000 8.11 Gross margin 27,28,000 26,26,000 1,02,000 3.88 Operating expenses:Selling expenses 5,01,000 6,30,000 -1,29,000 -20.48 General and administrative expenses 8,35,000 7,88,000 47,000 5.96 Total operating expenses 13,36,000 14,18,000 -82,000 -5.78 Operating income 13,92,000 12,08,000 1,84,000 15.23 Interest expense 1,39,000 1,58,000 -19,000 -12.03 Income before taxes 12,53,000 10,50,000 2,03,000 19.33 Income taxes 4,39,000 3,68,000 71,000 19.29 Net income 8,14,000 6,82,000 1,32,000 19.35 From the above calculations we can see that the area of major changes are selling expenses,operating income, interest expense, income before taxes, income taxes and net income.Due to decline in selling expenses there has been increase in total operating income. Furtherwe see that there has also been a decline in the interest expense. Due to reduction in expensesthe incomes before taxes have increased by almost 19%. Further, we see that there has beenan increase in income tax expense; this is due to higher taxable income, reason for which hasalready been explained. This overall leaves us with a 19% increased net income. Therefore,reduction in expenses has resulted in higher profits and higher taxes.4
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