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	$505,848		$446,000
Cost of goods sold	358,400		280,000
Gross profit	$147,448		$166,000
Selling expenses	$51,300		$38,000
Administrative expenses	30,050		24,000
Total operating expenses	$81,350		$62,000
Income from operations	$66,098		$104,000
Other revenue	2,371		1,900
Income before income tax	$68,469		$105,900
Income tax expense	19,200		31,800
Net income	$49,269		$74,100

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	$505,848	$446,000	$	%
Cost of goods sold	358,400	280,000		%
Gross profit	$147,448	$166,000	$	%
Selling expenses	$51,300	$38,000	$	%
Administrative expenses	30,050	24,000		%
Total operating expenses	$81,350	$62,000	$	%
Income from operations	$66,098	$104,000	$	%
Other revenue	2,371	1,900		%
Income before income tax	$68,469	$105,900	$	%
Income tax expense	19,200	31,800		%
Net income	$49,269	$74,100	$	%

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

Answer 1

• Requirement 1

McDade Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2	20Y1	Difference - Amount: Increase (Decrease)	Difference - Percent
	[A]	[B]	[C = A – B]	[D = (C/B) x 100]
Sales	$505,848	$446,000	$59,848	13.4%
Cost of goods sold	$358,400	$280,000	$78,400	28.0%
Gross profit	$147,448	$166,000	($18,552)	11.2%
Selling expenses	$51,300	$38,000	$13,300	35.0%
Administrative expenses	$30,050	$24,000	$6,050	25.2%
Total operating expenses	$81,350	$62,000	$19,350	31.2%
Income from operations	$66,098	$104,000	($37,902)	36.4%
Other revenue	$2,371	$1,900	$471	24.8%
Income before income tax	$68,469	$105,900	($37,431)	35.3%
Income tax expense	$19,200	$31,800	($12,600)	39.6%
Net income	$49,269	$74,100	($24,831)	33.5%

• Requirement 2

Net income has DECREASED  from 20Y1 to 20Y2. Sales have INCREASED  ; however, the cost of goods sold has INCREASED at faster rate  , causing the gross profit to DECREASE .