Question

A CMA performs a horizontal analysis on Jones Co’s historical data. Her results are shown below (in millions):

	Year 1	Year 2	Year 3	Year 4
Sales	250	275	280	285
Earnings Before Taxes	175	185	195	205
Tax Rate	35%	35%	35%	20%

What is the percentage increase in net income from Year 1 to Year 3?

Question 1 options:

	23.3%
	26.7%
	46.7%
	55.9%

Answer 1

• Question asks about % increase in Net Income from year 1 to Year 3
• However, I worked out whole data, and none of the options seems correct.
• Check the following workings

Working		Year 1	Year 2	Year 3	Year 4
A	Sales	$            250.00	$            275.00	$              280.00	$       285.00
B	Earnings Before Taxes	$            175.00	$            185.00	$              195.00	$       205.00
C	Tax Rate	35%	35%	35%	20%
D = B x C	Income Tax expense	$                   61.25	$                   64.75	$                      68.25	$             41.00
E = B - D	Net Income	$                113.75	$                120.25	$                   126.75	$          164.00

• Calculation of % Increase in Net Income

A	Year 1 Net Income	$               113.75
B	Year 3 Net Income	$                126.75
C = B - A	Increase in Net Income	$                   13.00 [126.75 – 113.75]
D = (C/A) x 100	% Increase in Net Income [13/113.75]	11.43% = Actual Answer

• Correct Answer =11.43% as calculated above.