Question

For 2016, Clapton Company reported a decline in net income. At the end of the year, S. Hand, the president, is presented with the following condensed comparative income statement:

Clapton Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1		2016	2015
2	Sales	$7,425,600.00	$6,720,000.00
3	Cost of goods sold	2,688,000.00	2,240,000.00
4	Gross profit	$4,737,600.00	$4,480,000.00
5	Selling expenses	$1,096,200.00	$870,000.00
6	Administrative expenses	636,300.00	505,000.00
7	Total operating expenses	$1,732,500.00	$1,375,000.00
8	Income from operations	$3,005,100.00	$3,105,000.00
9	Other income	144,300.00	130,000.00
10	Income before income tax	$3,149,400.00	$3,235,000.00
11	Income tax expense	75,400.00	65,000.00
12	Net income	$3,074,000.00	$3,170,000.00

	Required:
1.	Prepare a comparative income statement with horizontal analysis for the two-year period, using 2015 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.

Income Statement

Prepare a comparative income statement with horizontal analysis for the two-year period, using 2015 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.

Clapton Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1				Increase (Decrease)	Increase (Decrease)
2		2016	2015	Amount	Percent
3	Sales	$7,425,600.00	$6,720,000.00
4	Cost of goods sold	2,688,000.00	2,240,000.00
5	Gross profit	$4,737,600.00	$4,480,000.00
6	Selling expenses	$1,096,200.00	$870,000.00
7	Administrative expenses	636,300.00	505,000.00
8	Total operating expenses	$1,732,500.00	$1,375,000.00
9	Income from operations	$3,005,100.00	$3,105,000.00
10	Other income	144,300.00	130,000.00
11	Income before income tax	$3,149,400.00	$3,235,000.00
12	Income tax expense	75,400.00	65,000.00
13	Net income	$3,074,000.00	$3,170,000.00

Final Question

To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis.

Net income has from 2015 to 2016. Sales have ; however, the cost of goods sold has by a percentage, causing the gross profit to at a slower pace than sales.

Answer 1

Solution: (1)

Clapton Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015 1 Increase (Decrease) Increase (Decrease) 2 2016 2015 (Base Year) Amount Percent 3 Sales $7,425,600.00 $6,720,000.00 $ 705,600 10.5 4 Cost of goods sold 2,688,000.00 2,240,000.00 $ 448,000 20 5 Gross profit $4,737,600.00 $4,480,000.00 $ 257,600 5.8 6 Selling expenses $1,096,200.00 $870,000.00 $ 226,200 26 7 Administrative expenses 636,300.00 505,000.00 $ 131,300 26 8 Total operating expenses $1,732,500.00 $1,375,000.00 $ 357,500 26 9 Income from operations $3,005,100.00 $3,105,000.00      -$ 99,900 -3.2 10 Other income 144,300.00 130,000.00 $ 14,300 11 11 Income before income tax $3,149,400.00 $3,235,000.00 -$85,600 -2.6 12 Income tax expense 75,400.00 65,000.00 $ 10,400 16 13 Net income $3,074,000.00 $3,170,000.00 -$96,000 -3 Working Note: 1) Formula used for Increase / Decrease in amount = Current Year amount (2016) –Base Year amount (2015) 2) Formula used for Increase / Decrease in percent = [Current Year amount (2016) –Base Year amount (2015)] / Base Year amount (2015) X 100 Answer (2): Net income has reduced from 2015 to 2016. Sales have increased; however, the cost of goods sold has increased by a 20   percentage, causing the gross profit to increase   at a slower pace than sales.