Question

Income statement data for Winthrop Company for two recent years ended December 31 are as follows:

1		Current Year	Previous Year
2	Sales	$2,280,000.00	$2,000,000.00
3	Cost of goods sold	1,960,000.00	1,750,000.00
4	Gross profit	$320,000.00	$250,000.00
5	Selling expenses	$156,500.00	$125,000.00
6	Administrative expenses	122,000.00	100,000.00
7	Total operating expenses	$278,500.00	$225,000.00
8	Income before income tax	$41,500.00	$25,000.00
9	Income tax expense	16,600.00	10,000.00
10	Net income	$24,900.00	$15,000.00

A.	Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. Round percentages to one decimal place.
B.	What conclusions can be drawn from the horizontal analysis?

Answer 1

Solution A:

S.No.	Particulars	Current Year ($)	Previous Year ($)	Increase or (Decrease)
1				*Amount ($)	**Percentage (%)
2	Sales	$2,280,000.00	$2,000,000.00	$ 280,000.00	14.0
3	Cost of goods sold	1,960,000.00	1,750,000.00	210,000.00	12.0
4	Gross profit	$320,000.00	$250,000.00	70,000.00	28.0
5	Selling expenses	$156,500.00	$125,000.00	31,500.00	25.2
6	Administrative expenses	122,000.00	100,000.00	22,000.00	22.0
7	Total operating expenses	$278,500.00	$225,000.00	53,500.00	23.7
8	Income before income tax	$41,500.00	$25,000.00	16,500.00	66.0
9	Income tax expense	16,600.00	10,000.00	6,600.00	66.0
10	Net income	$24,900.00	$15,000.00	9,900.00	66.0

*Amount of change or increase or decrease                                           

= Current year amount – Previous year amount

**Percentage of change or increase or decrease

= Amount of change / Previous year amount X 100

Answer B.

The net income for Winthrop Company increased by 66 % this year. This increase was the combined result of an increase in sales of 14% and lower percentage increase (12%) in cost of goods sold.

The cost of goods sold increased at a slower rate than the increase in sales, thus causing the 28 percentage increase in gross profit which is greater than the percentage increase in sales that is 14%.