Byte City, Inc., is a leading independent provider of systems and network management software. Its income statements are abbreviated as follows:

2000 1999 Net revenues Software products $64,282,171 $ 52,392,108 Product support and enhancements 32,545,876 27,419,766 Total net revenues 96,828,047 79,811,874 Operating expenses Cost of goods sold 3,614,919 3,215,778 Sales and marketing 45,782,349 38,372,418 Research, development, and support 23,582,478 27,652,020 General and administrative 14,622,594 14,887,923 Write-down of marketing rights and restructuring expenses 0 17,236,845 Total operating expenses 87,602,340 101,364,984 Income (loss) from operations $ 9,225,707 ($21,553,110)

Required

a. Conduct a horizontal and vertical analysis of Byte City’s income statement.

b. Identify any major unusual items in either year. How might these items affect the future? How might they have been reflected in prior years? How might they have been caused by events in prior years?

c. Discuss why Byte City’s cost of goods sold is so low relative to other expenses, and also with respect to revenues.

d. Restate 1999’s income (loss) from operations by excluding the $17,236,845 write-down. What does this restated amount indicate about possible trends in Byte City’s total operating expenses? How does this affect the trend in income from operations?

e. Based only on the information provided, would you predict that Byte City would have a positive income from operations in 2001? Why? By extending the trends in net revenues and in operating expenses to 2001, what amount of income from operations would you predict?