Question

Horizontal Analysis of the Income Statement

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

	Current Year			Previous Year
Sales	$488,000			$400,000
Cost of goods sold	420,000			350,000
Gross profit	$68,000			$50,000
Selling expenses	$19,040			$17,000
Administrative expenses	16,800			14,000
Total operating expenses	$35,840			$31,000
Income before income tax	$32,160			$19,000
Income tax expenses	12,900			7,600
Net income	$19,260			$11,400

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.

Boone Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$488,000	$400,000	$	%
Cost of goods sold	420,000	350,000		%
Gross profit	$68,000	$50,000	$	%
Selling expenses	19,040	17,000		%
Administrative expenses	16,800	14,000		%
Total operating expenses	$35,840	$31,000	$	%
Income before income tax	$32,160	$19,000	$	%
Income tax expense	12,900	7,600		%
Net income	$19,260	$11,400	$	%

b. The net income for Boone Company increased by 68.9% between years. This increase was the combined result of an   in sales of 22% 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

Common Size Income Statement
			Current	Previous		Inc /(Dec)	Inc /(Dec)
			Amount $	Amount $		Amount	%
Sales			488000	400000		88000	22.00%
Cost of goods sold		420000	350000		70000	20.00%
Gross Profit		68000	50000		18000	36.00%
Selling expenses		19040	17000		2040	12.00%
Admin expense		16800	14000		2800	20.00%
Total Operating expense	35840	31000		4840	15.61%
Income before income tax	32160	19000		13160	69.26%
Income tax expense		12900	7600		5300	69.74%
Net Income		19260	11400		7860	68.95%
The Net Income of cmpany increased by 68.90%
This increase was the combined result of increase in sales by 22% and percentage increase in cost of goods sold by 20%.
The cost of goods sold is increased at a rate lower than sales, thus causing the percentage increase in gross profit to be higher than the percentage increase in sales.