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	$496,100			$410,000
Cost of goods sold	413,000			350,000
Gross profit	$83,100			$60,000
Selling expenses	$23,310			$21,000
Administrative expenses	20,230			17,000
Total operating expenses	$43,540			$38,000
Income before income tax	$39,560			$22,000
Income tax expenses	15,800			8,800
Net income	$23,760			$13,200

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	$496,100	$410,000	$	%
Cost of goods sold	413,000	350,000		%
Gross profit	$83,100	$60,000	$	%
Selling expenses	$23,310	$21,000	$	%
Administrative expenses	20,230	17,000		%
Total operating expenses	$43,540	$38,000	$	%
Income before income tax	$39,560	$22,000	$	%
Income tax expense	15,800	8,800		%
Net income	$23,760	$13,200	$	%

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.

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$496,100	$410,000	$86,100	21%
Cost of goods sold	413,000	350,000	$63,000	18%
Gross profit	$83,100	$60,000	$23,100	38.5%
Selling expenses	$23,310	$21,000	$2,310	11%
Administrative expenses	20,230	17,000	$3,230	19%
Total operating expenses	$43,540	$38,000	$5,540	14.6%
Income before income tax	$39,560	$22,000	$17,560	79.8%
Income tax expense	15,800	8,800	$7,000	79.5%
Net income	$23,760	$13,200	$10,560	80%

b)

The net income for Winthrop Company increased between years. This increase was the combined result of an increase in sales and increase in cost of goods sold. The cost of goods sold increased at a  rate lower than the increase in sales, thus causing the percentage increase in gross profit to be higher than the percentage increase in sales.