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	$806,000			$650,000
Cost of goods sold	683,200			560,000
Gross profit	$122,800			$90,000
Selling expenses	$35,340			$31,000
Administrative expenses	31,720			26,000
Total operating expenses	$67,060			$57,000
Income before income tax	$55,740			$33,000
Income tax expenses	22,300			13,200
Net income	$33,440			$19,800

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	$806,000	$650,000	$	%
Cost of goods sold	683,200	560,000		%
Gross profit	$122,800	$90,000	$	%
Selling expenses	$35,340	$31,000	$	%
Administrative expenses	31,720	26,000		%
Total operating expenses	$67,060	$57,000	$	%
Income before income tax	$55,740	$33,000	$	%
Income tax expense	22,300	13,200		%
Net income	$33,440	$19,800	$	%

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.

Answer 1

(a)-The comparative income statement with horizontal analysis,

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year	Previous year	Increase / (Decrease)	Increase / (Decrease)
	Amount	Amount	Amount	Percent
Sales	806,000	650,000	156,000	24.0%
Cost of goods sold	683,200	560,000	123,200	22.0%
Gross profit	122,800	90,000	32,800	36.4%
Selling expenses	35,340	31,000	4,340	14.0%
Administrative expenses	31,720	26,000	5,720	22.0%
Total operating expenses	67,060	57,000	10,060	17.6%
Income before income tax	55,740	33,000	22,740	68.9%
Income tax expense	22,300	13,200	9,100	68.9%
Net income	33,440	19,800	13,640	68.9%

b. The net income for Winthrop Company increased between years. This increase was the combined result of an INCREASE in sales 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.