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	$7,369,600.00	$6,580,000.00
3	Cost of goods sold	2,719,733.00	2,193,333.00
4	Gross profit	$4,649,867.00	$4,386,667.00
5	Selling expenses	$1,049,600.00	$820,000.00
6	Administrative expenses	658,050.00	535,000.00
7	Total operating expenses	$1,707,650.00	$1,355,000.00
8	Income from operations	$2,942,217.00	$3,031,667.00
9	Other income	132,000.00	120,000.00
10	Income before income tax	$3,074,217.00	$3,151,667.00
11	Income tax expense	47,600.00	40,000.00
12	Net income	$3,026,617.00	$3,111,667.00

	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.

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	$7,369,600.00	$6,580,000.00
4	Cost of goods sold	2,719,733.00	2,193,333.00
5	Gross profit	$4,649,867.00	$4,386,667.00
6	Selling expenses	$1,049,600.00	$820,000.00
7	Administrative expenses	658,050.00	535,000.00
8	Total operating expenses	$1,707,650.00	$1,355,000.00
9	Income from operations	$2,942,217.00	$3,031,667.00
10	Other income	132,000.00	120,000.00
11	Income before income tax	$3,074,217.00	$3,151,667.00
12	Income tax expense	47,600.00	40,000.00
13	Net income	$3,026,617.00	$3,111,667.00

Answer 1

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1				Increase (Decrease)	Increase (Decrease)
2		2016	2015	Amount	Percent
3	Sales	$7,369,600.00	$6,580,000.00	$ 789600	=789600*100/6580000= 12%
4	Cost of goods sold	2,719,733.00	2,193,333.00	$526400	=526400*100/2193333=24%
5	Gross profit	$4,649,867.00	$4,386,667.00	$ 263200	=263200*100/4386667=6%
6	Selling expenses	$1,049,600.00	$820,000.00	$ 229600	=229600*100/820000= 28%
7	Administrative expenses	658,050.00	535,000.00	$ 123050	=123050*100/535000=23%
8	Total operating expenses	$1,707,650.00	$1,355,000.00	$ 352650	=352650*100/1355000= 26%
9	Income from operations	$2,942,217.00	$3,031,667.00	$ (89450)	=(89450)*100/3031667=(2.95)%
10	Other income	132,000.00	120,000.00	$ 12000	=12000*100/120000 = 10%
11	Income before income tax	$3,074,217.00	$3,151,667.00	$ 77450	=77450*100/3151667=2.45%
12	Income tax expense	47,600.00	40,000.00	$ 7600	=7600*100/40000= 19%
13	Net income	$3,026,617.00	$3,111,667.00

On analysing the horizontal analysis we can say that both incomes and expenses increase as compared to the base year 2015 in 2016. The only decrease is in income from operations in 2016 as compared to 2015. There is increase by twice in cost of goods sold as compared to sales and due to which the overall gross profit increases by half of the increase in revenue %.