Question

Horizontal Analysis of the Income Statement

Income statement data for Winthrop Company for two recent years ended December 31, are as follows:

	Current Year			Previous Year
Sales	$925,000			$740,000
Cost of goods sold	780,800			640,000
Gross profit	$144,200			$100,000
Selling expenses	$41,400			$36,000
Administrative expenses	36,900			30,000
Total operating expenses	$78,300			$66,000
Income before income tax	$65,900			$34,000
Income tax expenses	26,400			13,600
Net income	$39,500			$20,400

a. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. If required, round to one decimal place.

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$925,000	$740,000	$	%
Cost of goods sold	780,800	640,000		%
Gross profit	$144,200	$100,000	$	%
Selling expenses	$41,400	$36,000	$	%
Administrative expenses	36,900	30,000		%
Total operating expenses	$78,300	$66,000	$	%
Income before income tax	$65,900	$34,000	$	%
Income tax expense	26,400	13,600		%
Net income	$39,500	$20,400	$	%

b. The net income for Winthrop Company increased between years. This increase was the combined result of an in sales and percentage in cost of goods sold. The cost of goods sold increased at a rate than the increase in sales, thus causing the percentage increase in gross profit to be than the percentage increase in sales.

Check My Work2 more Check My Work uses remaining.

Answer 1

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current	Previous	Increase	Increase
	year	year	(Decrease)	(Decrease)
	Amount	Amount	Amount	Percent
Sales	$925,000	$740,000	185000	25.0%
Cost of goods sold	780,800	640,000	140800	22.0%
Gross profit	$144,200	$100,000	44200	44.2%
Selling expenses	$41,400	$36,000	5400	15.0%
Administrative expenses	36,900	30,000	6900	23.0%
Total operating expenses	$78,300	$66,000	12300	18.6%
Income before income tax	$65,900	$34,000	31900	93.8%
Income tax expense	26,400	13,600	12800	94.1%
Net income	$39,500	$20,400	19100	93.6%
b
The net income for Winthrop Company increased by 93.6% between years. This increase was the
combined result of an in sales by 25% and lower percentage increase in cost of goods sold. The cost of goods sold
increased at a slower rate than the increase in sales, thus causing the percentage increase in gross profit
to be greater than the percentage increase in sales.