Question

Solve the follwing problem.

Horizontal analysis of income statement

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	$6,787,200.00	$6,060,000.00
3	Cost of goods sold	2,444,200.00	2,020,000.00
4	Gross profit	$4,343,000.00	$4,040,000.00
5	Selling expenses	$1,125,000.00	$900,000.00
6	Administrative expenses	711,200.00	560,000.00
7	Total operating expenses	$1,836,200.00	$1,460,000.00
8	Income from operations	$2,506,800.00	$2,580,000.00
9	Other income	165,000.00	150,000.00
10	Income before income tax	$2,671,800.00	$2,730,000.00
11	Income tax expense	60,000.00	50,000.00
12	Net income	$2,611,800.00	$2,680,000.00

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

Answer:

Part - 1

Particulars	20Y2	20Y1	Increase (Decrease) Amount	Increase (Decrease) Percentage
Sales	6787200	6060000	727200	12%
Cost of goods sold	2444200	2020000	424200	21%
Gross profit	4343000	4040000	303000	7.5%
Selling expenses	1125000	900000	225000	25%
Administrative expenses	711200	560000	151000	27%
Total operating expenses	1836200	1460000	376000	25.75%
Income from operations	2506800	2580000	(73200)	-2.8%
Other income	165000	150000	15000	10%
Income before income tax	2671800	2730000	(58200)	-2.13%
Income tax expense	60000	50000	10000	20%
Net income	2611800	2680000	(68200)	-2.54%

Part-2

As we can see that sales for year 20y2 increased by 12% yet there is decrease in net income by 2.54% negative

The reason behind decreased in the net income of the company for the year 20y2 is as under

• There is increase in cost of goods sold percentage compare to year20y1 so ultimately decrease in gross profit
• We can also see there is increase in the operating expanses of the company at a higher rate then increase in the sales rate