Accounting 26th Edition by Carl Warren,James Reeve,Jonathan Duchac

Exercise 7

Sales discounts
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:

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:

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).