Week 3 Sales and Income Trends
Sales and Income Trends
(see Amalgamated Hat Rack’s income statements for 2013-2016 below)
Question: Are things going well or poorly for Amalgamated Hat Rack?
Answer: It depends.
| 2013 | 2014 | 2015 | 2016 | ||
| Retail Sales | $1,500,000 | $1,720,000 | $2,000,000 | $2,200,000 | |
| Corporate Sales | $1,200,000 | $1,100,000 | $1,000,000 | $1,000,000 | |
| Total Sales Revenue | $2,700,000 | $2,820,000 | $3,000,000 | $3,200,000 | |
| Less: Cost of Goods Sold | $1,300,000 | $1,400,000 | $1,550,000 | $1,600,000 | |
| Gross Profit | $1,400,000 | $1,420,000 | $1,450,000 | $1,600,000 | |
| Less: Operating Expenses | $805,000 | $812,000 | $810,000 | $800,000 | |
| Deprecation Expense | $42,500 | $45,500 | $44,500 | $42,500 | |
| Earnings before Interest and Taxes | $552,500 | $562,500 | $595,500 | $757,500 | |
| Less: Interest Expense | $150,000 | $150,000 | $110,000 | $110,000 | |
| Earnings before Income Tax | $402,500 | $412,500 | $485,500 | $647,500 | |
| Less: Income Tax | $161,000 | $165,000 | $194,200 | $300,000 | |
| Net Income | $241,500 | $247,500 | $291,300 | $347,500 | |
Table: Amalgamated Hat Rack Multiperiod Income Statement Updated
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002) Updated
For example, sales in 2015 were $3,000,000 so you would take 2016’s sales of $3,200,000 as a good sign. If sales in 2015 were $5,000,000, however, you would be unhappy with this year’s sales of $3,200,000. This illustrates the concept that most things in business are relative. Sales of $3,200,000 might be good or bad. It depends. Therefore, when you analyze a company’s financial status, one of the things you want to do is check trends over time, to assess “where things are going.”
When you are analyzing sales and income trends a chart is often helpful. For example, the link below will take you to a chart for Amalgamated Hat Rack for 2013 through 2016:
Hat Rack Image-1.pdf
Download Hat Rack Image-1.pdf
Now you can assess how things are going for Amalgamated Hat Rack. For example, you can see that sales have been increasing almost linearly for the last four years, which is good, and net income (that is, profits), with the exception of 2014, has kept pace.
If you wanted to go a little further, you might calculate the growth rates in sales and net income, and observe that sales has been growing at a compound average rate of 5.84% while net income has been growing at 12.84%. This is quite favorable, as it indicates the firm is betting better control of its expenses each year. The online calculator at http://www.investopedia.com/calculator/cagr.aspx Links to an external site. can help with the calculation of the average growth rate. Remember the number of periods = 3 in this example.