Question

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
	20Y2		20Y1
Sales	$815,178		$741,000
Cost of goods sold	573,400		470,000
Gross profit	$241,778		$271,000
Selling expenses	$79,050		$62,000
Administrative expenses	46,720		39,000
Total operating expenses	$125,770		$101,000
Income from operations	$116,008		$170,000
Other revenue	4,024		3,100
Income before income tax	$120,032		$173,100
Income tax expense	33,600		51,900
Net income	$86,432		$121,200

Required:

1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. Round percentages to one decimal place. Use the minus sign to indicate a decrease in the "Increase (Decrease)" columns.

McDade Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2	20Y1	Difference - Amount	Difference - Percent
Sales	$815,178	$741,000	$	%
Cost of goods sold	573,400	470,000		%
Gross profit	$241,778	$271,000	$	%
Selling expenses	$79,050	$62,000	$	%
Administrative expenses	46,720	39,000		%
Total operating expenses	$125,770	$101,000	$	%
Income from operations	$116,008	$170,000	$	%
Other revenue	4,024	3,100		%
Income before income tax	$120,032	$173,100	$	%
Income tax expense	33,600	51,900		%
Net income	$86,432	$121,200	$	%

2. Net income has   from 20Y1 to 20Y2. Sales have  ; however, the cost of goods sold has  , causing the gross profit to  . (Increase,Decrease)

Answer 1

Solution

McDade Company
Comparative Income statement
Horizontal analysis
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2	20Y1	Change	% change
Sales	$        815,178.00	$    741,000.00	$      74,178.00	10.0%
Cost of goods sold	$        573,400.00	$    470,000.00	$    103,400.00	22.0%
Gross Margin	$        241,778.00	$    271,000.00	$    (29,222.00)	-10.8%
Selling expenses	$          79,050.00	$      62,000.00	$      17,050.00	27.5%
Administrative expenses	$          46,720.00	$      39,000.00	$        7,720.00	19.8%
Total Operating expenses	$        125,770.00	$    101,000.00	$      24,770.00	24.5%
Income from operations	$        116,008.00	$    170,000.00	$    (53,992.00)	-31.8%
Other revenue	$            4,024.00	$        3,100.00	$            924.00	29.8%
Income before income taxes	$        120,032.00	$    173,100.00	$    (53,068.00)	-30.7%
Income tax expense	$          33,600.00	$      51,900.00	$    (18,300.00)	-35.3%
Net income	$          86,432.00	$    121,200.00	$    (34,768.00)	-28.7%

Requirement 2

Net income has Decreased from 20Y1 to 20Y2. Sales have Increased ; however, the cost of goods sold has Increased causing the gross profit to Decrease.