Question

Horizontal Analysis of the Income Statement

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

	Current Year			Previous Year
Sales	$725,000			$580,000
Cost of goods sold	597,800			490,000
Gross profit	$127,200			$90,000
Selling expenses	$36,800			$32,000
Administrative expenses	33,210			27,000
Total operating expenses	$70,010			$59,000
Income before income tax	$57,190			$31,000
Income tax expenses	22,900			12,400
Net income	$34,290			$18,600

a. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. If required, round to one decimal place.

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$725,000	$580,000	$	%
Cost of goods sold	597,800	490,000		%
Gross profit	$127,200	$90,000	$	%
Selling expenses	36,800	32,000		%
Administrative expenses	33,210	27,000		%
Total operating expenses	$70,010	$59,000	$	%
Income before income tax	$57,190	$31,000	$	%
Income tax expense	22,900	12,400		%
Net income	$34,290	$18,600	$	%

b. The net income for Winthrop Company increased by 84.4% between years. This increase was the combined result of an in sales of 25% and percentage in cost of goods sold. The cost of goods sold increased at a rate than the increase in sales, thus causing the percentage increase in gross profit to be than the percentage increase in sales.

Answer 1

	Answer for Part A
	Winthrop Company
	Comparative Income Statement
	For the Years Ended December 31
	Particulars	Current	Previous	Increase	Increase
		year	year	(Decrease)	(Decrease)
		Amount	Amount	Amount	Percent
		(1)	(2)	(3) =	(4)=
				(1)-(2)	{(3)/(2)}*100
	Sales (A)	$725,000	$580,000	$145,000	25.0%
	Cost of goods sold (B)	$597,800	$490,000	$107,800	22.0%
	Gross profit ( C ) = (A) - (B)	$127,200	$90,000	$37,200	41.3%
	Selling expenses (D)	$36,800	$32,000	$4,800	15.0%
	Administrative expenses (E)	$33,210	$27,000	$6,210	23.0%
	Total operating expenses (F) = (D) + (E)	$70,010	$59,000	$11,010	18.7%
	Income before income tax (G) = ( C) - (F)	$57,190	$31,000	$26,190	84.5%
	Income tax expense (H)	$22,900	$12,400	$10,500	84.7%
	Net income (I) = (G) -(H)	$34,290	$18,600	$15,690	84.4%
	Explanation for the Answer:
1	Sales is indicated as (A)
2	Cost of Goods Sold is indicated as (B)
3	To Arrive at Gross Profit ( C), deduct the Cost of Goods sold from Sales i.e. ( A) -(B)
4	Add Selling Expenses ( D) , Administrative Expenses (E) to arrive at Total Operating Expenses (F)
5	Deduct Total operating Expenses arrived above (F) from Gross Profit ( C) to arrive at Income Before Income Tax ( G)
6	Income Tax Expenses are indicated as (H)
7	Net Income (I) is derived by deducting the Income Tax Expenses (H) from Income before Income Tax (G)
1	Current year Amounts are indicated as (1)
2	Previous Year Amounts are indicated as (2)
3	Increase or (decrease) Amount are indicated as (3) , which is deriveby Deducting Previous Year Amounts (2) from Current Year Amounts (1)
4	Increase or (decrease) percent is idncated ad (4), which is derived by dividing Increase (Decrease) Amount (3) by Previous Year Amount (2) multiplying the resulting amount with 100 to arrive the percentage
	The logic here is to find the amount & percentage of increase (decrease) from Prior year to current year. Hence Previous year amounts are considered as base for arriving the percentage
	Answer for Part B
	The net income for Winthrop Company increased by 84.4% between years. This increase was the combined result of an increase  in sales of 25% and  22% percentage increase   in cost of goods sold. The cost of goods sold increased at a  3% rate less than the increase in sales, thus causing the 41.3 percentage increase in gross profit to be more   than the percentage increase in sales