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In: Accounting

Horizontal Analysis of the Income Statement Income statement data for Winthrop Company for two recent years...

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.

Solutions

Expert Solution

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.


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