Question

1. 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	$533,400			$420,000
   Cost of goods sold	434,000			350,000
   Gross profit	$99,400			$70,000
   Selling expenses	$29,250			$25,000
   Administrative expenses	26,250			21,000
   Total operating expenses	$55,500			$46,000
   Income before income tax	$43,900			$24,000
   Income tax expenses	17,600			9,600
   Net income	$26,300			$14,400

   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	$533,400	$420,000	$	%
   Cost of goods sold	434,000	350,000		%
   Gross profit	$99,400	$70,000	$	%
   Selling expenses	29,250	25,000		%
   Administrative expenses	26,250	21,000		%
   Total operating expenses	$55,500	$46,000	$	%
   Income before income tax	$43,900	$24,000	$	%
   Income tax expense	17,600	9,600		%
   Net income	$26,300	$14,400	$	%

   Feedback

   a. Show the difference in each line item amount as either an increase or a decrease. Divide each difference by the base year amount for that item to obtain the horizontal percentage.

   Learning Objective 2

   b. The net income for Boone Company increased by 82.6% between years. This increase was the combined result of an increase

   • increase
   • decrease
   in sales of 27% and higher
   • higher
   • lower
   percentage increase
   • increase
   • decrease
   in cost of goods sold. The cost of goods sold increased at a slower
   • slower
   • faster
   rate than the increase in sales, thus causing the percentage increase in gross profit to be greater
   • greater
   • less
   than the percentage increase in sales.

   Feedback

   b. Review the relationship the accounts have and the effect the differences show about the business.

   Learning Objective 2

   Feedback

   Partially correct

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Answer 1

• [1]

Boone Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
	[A]	[B]	[C = A- B]	[D = (C/B) x 100
Sales	$533,400	$420,000	$113,400	27.0%
Cost of goods sold	$434,000	$350,000	$84,000	24.0%
Gross profit	$99,400	$70,000	$29,400	42.0%
Selling expenses	$29,250	$25,000	$4,250	17.0%
Administrative expenses	$26,250	$21,000	$5,250	25.0%
Total operating expenses	$55,500	$46,000	$9,500	20.7%
Income before income tax	$43,900	$24,000	$19,900	82.9%
Income tax expense	$17,600	$9,600	$8,000	83.3%
Net income	$26,300	$14,400	$11,900	82.6%

• [2]

The net income for Boone Company increased by 82.6% between years. This increase was the combined result of an increase in sales of 27% 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.