Question

For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income statement:

McDade Company

Comparative Income Statement

For the Years Ended December 31, 20Y2 and 20Y1

1		20Y2	20Y1
2	Sales	$7,369,600.00	$6,580,000.00
3	Cost of goods sold	2,719,733.00	2,193,333.00
4	Gross profit	$4,649,867.00	$4,386,667.00
5	Selling expenses	$1,049,600.00	$820,000.00
6	Administrative expenses	658,050.00	535,000.00
7	Total operating expenses	$1,707,650.00	$1,355,000.00
8	Income from operations	$2,942,217.00	$3,031,667.00
9	Other income	132,000.00	120,000.00
10	Income before income tax	$3,074,217.00	$3,151,667.00
11	Income tax expense	47,600.00	40,000.00
12	Net income	$3,026,617.00	$3,111,667.00

1.	Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.
2.	To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).

Answer 1

McDade Company
Comparative Income statement
Horizontal analysis
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2	20Y1	Change	% change
Sales	$ 7,369,600	$ 6,580,000	$ 789,600	12.0%
Cost of goods sold	$ 2,719,733	$ 2,193,333	$ 526,400	24.0%
Gross Margin	$ 4,649,867	$ 4,386,667	$ 263,200	6.0%
Selling expenses	$ 1,049,600	$ 820,000	$ 229,600	28.0%
Administrative expenses	$ 658,050	$ 535,000	$ 123,050	23.0%
Total Operating expenses	$ 1,707,650	$ 1,355,000	$ 352,650	26.0%
Income from operations	$ 2,942,217	$ 3,031,667	-$ 89,450	-3.0%
Other income	$ 132,000	$ 120,000	$ 12,000	10.0%
Income before income taxes	$ 3,074,217	$ 3,151,667	-$ 77,450	-2.5%
Income tax expense	$ 47,600	$ 40,000	$ 7,600	19.0%
Net income	$ 3,026,617	$ 3,111,667	-$ 85,050	-2.7%

The overall net income of the company has decreased. The reason for decrease in income is not decrease in revenue since revenue has increased but the reason is that the expenses increase more than increase in revenue. The increase is expenses is 26% whereas revenue increased only by 12%. Decrease in income is also due to increase in tax rate as can be seen by increased tax expenses even when income before taxes decreases.