Your sister operates Watercraft Supply Company, an online boat parts distributorship that is in its third year of operation. The following income statement was recently prepared for the year ended October 31, 2016:
Watercraft Supply Company
Income Statement
For the Year Ended October 31, 2016
Revenues:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,350,000
Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,365,000
Expenses:
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$810,000
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 140,000
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .90,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,044,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .$ 321,000
Your sister is considering a proposal to increase net income by offering sales discounts of 2/15, n/30, and by shipping all merchandise FOB shipping point. Currently, no sales discounts are allowed and merchandise is shipped FOB destination. It is estimated that these credit terms will increase sales by 10%. The ratio of the cost of merchandise sold to sales is expected to be 60%. All selling and administrative expenses are expected to remain unchanged, except for store supplies, miscellaneous selling, office supplies, and miscellaneous administrative expenses, which are expected to increase proportionately with increased sales. The amounts of these preceding items for the year ended October 31, 2016, were as follows:
Store supplies expense ................................... $12,000
Miscellaneous selling expense ............................ 6,000
Office supplies expense ..................................... 3,000
Miscellaneous administrative expense ................... 2,500
The other income and other expense items will remain unchanged. The shipment of all merchandise FOB shipping point will eliminate all delivery expenses, which for the year ended October 31, 2016, were $12,000.
1. Prepare a projected single-step income statement for the year ending October 31, 2017, based on the proposal. Assume all sales are collected within the discount period.
2. a. Based on the projected income statement in (1), would you recommend the implementation of the proposed changes?
b. Describe any possible concerns you may have related to the proposed changes described in (1).