Question

Solve the following problem.

Solve the follwing problem.

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

1		20Y2	20Y1
2	Sales	$6,787,200.00	$6,060,000.00
3	Cost of goods sold	2,444,200.00	2,020,000.00
4	Gross profit	$4,343,000.00	$4,040,000.00
5	Selling expenses	$1,125,000.00	$900,000.00
6	Administrative expenses	711,200.00	560,000.00
7	Total operating expenses	$1,836,200.00	$1,460,000.00
8	Income from operations	$2,506,800.00	$2,580,000.00
9	Other income	165,000.00	150,000.00
10	Income before income tax	$2,671,800.00	$2,730,000.00
11	Income tax expense	60,000.00	50,000.00
12	Net income	$2,611,800.00	$2,680,000.00

1.	Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.
2.	To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).

Answer 1

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		a	b	c=a-b	d=c/b
1		20Y2	20Y1	Increase/(Decrease)	% Increase/(Decrease)
2	Sales	$      6,787,200	$      6,060,000	$                   727,200	12.00%
3	Cost of goods sold	$      2,444,200	$      2,020,000	$                   424,200	21.00%
4	Gross profit	$      4,343,000	$      4,040,000	$                   303,000	7.50%
5	Selling expenses	$      1,125,000	$         900,000	$                   225,000	25.00%
6	Administrative expenses	$         711,200	$         560,000	$                   151,200	27.00%
7	Total operating expenses	$      1,836,200	$      1,460,000	$                   376,200	25.77%
8	Income from operations	$      2,506,800	$      2,580,000	$                    -73,200	-2.84%
9	Other income	$         165,000	$         150,000	$                     15,000	10.00%
10	Income before income tax	$      2,671,800	$      2,730,000	$                    -58,200	-2.13%
11	Income tax expense	$           60,000	$           50,000	$                     10,000	20.00%
12	Net income	$      2,611,800	$      2,680,000	$                    -68,200	-2.54%