Question

Chapter 2 Basic Accounting Systems: Cash Basis MBA 2-6 Common-sized income statements Kellogg Company (K) produces, markets, and distributes cereal and food products, including Cheez-It, Coco Pops, Rice Krispies, and Pringles. The following partial income statements Gin millions) were adapted from recent financial statements, Year 1 Year 2 Sales.. Cost of goods sold ....... Gross profit ......... Selling and administrative expenses Operating income..... $14,792 (8,689) $ 6,103 (3.266) $ 2,837 $14,580 (9,517) $ 5,063 (4,039) $ 1,024 1. Prepare common-sized income statements for Years 1 and 2. Round to one decimal place. 2. Using your answer to (1), analyze the performance of Kellogs in Year 2.

Help with 1 and 2 please

Answer 1

Ans. 1	KELLIOGG COMPANY
	Comparative Income Statements
	(in millions)
		YEAR 1		YEAR 2
		Amount	%	Amount	%
	Sales	$14,792	100.0%	$14,580	100.0%
	Cost of goods sold	-$8,689	-58.7%	-$9,517	-65.3%
	Gross profit	$6,103	41.3%	$5,063	34.7%
	Selling and administrative expenses	-$3,266	-22.1%	-$4,039	-27.7%
	Operating income	$2,837	19.2%	$1,024	7.0%
	*In a common size income statement, all percentages are calculated on the basis of sales.
	Amount in percentage for Year 1 =   Particular amount of Year 1 / Sales of Year 1 * 100
	Amount in percentage for Year 2 =   Particular amount of Year 2 / Sales of Year 2 * 100
Ans. 2	This vertical analysis indicates that the gross profit as percentage of sales is decreasing by
	6.6% (i.e. 41.3% - 34.7%) from year 1 to year 2.
	Just as operating income is also decreasing by 12.2% (i.e. 19.2% - 7%) in year 2 from year 1.
	Therefore, we can say that the company is not performing well in comparison to previous year (1).