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Teicher Company presents the following condensed comparative income statements

Rate of Change Analyses

Teicher Company presents the following condensed comparative income statements:

For Years Ended December 31,
Year 5Year 4Year 3
Sales (net)$120,000$100,000$85,000
Cost of goods sold-72,000-55,000-45,000
Gross profit$48,000$45,000$40,000
Operating expenses-22,000-20,000-18,000
Operating income$26,000$25,000$22,000
Other items:   
    Dividend revenue400500200
    Interest expense-1,200-1,000-500
Income before income taxes$25,200$24,500$21,700
Income tax expense-8,200-8,000-6,000
Net income$17,000$16,500$15,700
Number of common shares6,0006,0005,000
Earnings per share$2.83$2.75$3.14

Next Level Prepare rate of change analyses for Teicher for Year 4 and Year 5 using year-to-year growth rates.

Round Earnings per Share computation to two decimal places. If required, round all percentage changes to one decimal place. If an amount is zero, enter a “0”; do not leave the amount box blank.

Answer and Explanation

Year 5Year 4Year 3Year-to-YearYear-to-YearYear-to-YearYear-to-Year
Increase (Decrease)
Year 4 to 5
Amoun
t
Increase (Decrease)
Year 4 to 5 %
Increase (Decrease)
Year 3 to 4
Amount
Increase (Decrease)
Year 3 to 4 %
Sales (net)$120,000$100,000$85,000$20,00020.0%$15,00017.6%
Cost of goods sold-72,000-55,000-45,000($17,000)30.9%($10,000)22.2%
Gross profit$48,000$45,000$40,000$3,0006.7%$5,00012.5%
Operating expenses-22,000-20,000-18,000($2,000)10.0%($2,000)11.1%
Operating income$26,000$25,000$22,000$1,0004.0%$3,00013.6%
Other items:   $0$0
    Dividend revenue400500200($100)-20.0%$300150.0%
    Interest expense-1,200-1,000-500($200)20.0%($500)100.0%
Income before income taxes$25,200$24,500$21,700$7002.9%$2,80012.9%
Income tax expense-8,200-8,000-6,000($200)2.5%($2,000)33.3%
Net income$17,000$16,500$15,700$5003.0%$8005.1%
Number of common shares6,0006,0005,000$00.0%$1,00020.0%
Earnings per share$2.83$2.75$3.14    0.082.9% (0.39)-12.4%

What favorable or unfavorable trends do your analyses reveal about Teicher Company’s financial performance?

The analyses reveal that the company ____has____  experienced significant growth rates in sales over the 2-year period, but ____ has_____  experienced even more significant growth rates in cost of goods sold. In addition, growth in operating expenses and income taxes substantially moderated the _____increase _____  in net income. The percentage ____increase____  in cost of goods sold between Year 4 and Year 5 was particularly large. Although the percentage _____increase ______ in net income was _____ greater_____ from Year 3 to Year 4 than it was from Year 4 to Year 5, there was a ____negative____  percentage change in earnings per share from Year 3 to Year 4 due to the large ____increase____  in the common shares outstanding. The large percentage changes in dividend revenue and interest expense are primarily the result of the use of small numbers as the bases and _____should not____  be attached undue significance.

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