Question

For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income statement:

Question not attempted.

McDade Company

Comparative Income Statement

For the Years Ended December 31, 20Y2 and 20Y1

1		20Y2	20Y1
2	Sales	$16,800,000.00	$15,000,000.00
3	Cost of goods sold	11,500,000.00	10,000,000.00
4	Gross profit	$5,300,000.00	$5,000,000.00
5	Selling expenses	$1,770,000.00	$1,500,000.00
6	Administrative expenses	1,220,000.00	1,000,000.00
7	Total operating expenses	$2,990,000.00	$2,500,000.00
8	Income from operations	$2,310,000.00	$2,500,000.00
9	Other income	256,950.00	225,000.00
10	Income before income tax	$2,566,950.00	$2,725,000.00
11	Income tax expense	1,413,000.00	1,500,000.00
12	Net income	$1,153,950.00	$1,225,000.00

1.	Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 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 prepared in (1).

Answer 1

1

	20Y2	20Y1	Increase (Decrease) Amount	Increase (Decrease) Percentage
Sales	16800000	15000000	1800000	12.0%
Cost of goods sold	11500000	10000000	1500000	15.0%
Gross profit	5300000	5000000	300000	6.0%
Selling expenses	1770000	1500000	270000	18.0%
Administrative expenses	1220000	1000000	220000	22.0%
Total operating expenses	2990000	2500000	490000	19.6%
Income from operations	2310000	2500000	-190000	-7.6%
Other income	256950	225000	31950	14.2%
Income before income tax	2566950	2725000	-158050	-5.8%
Income tax expense	1413000	1500000	-87000	-5.8%
Net income	1153950	1225000	-71050	-5.8%

Part-2

As we can see that sales for year 20y2 increased by 12% yet there is decrease in net income by 5.8% negative

The reason behind decreased in the net income of the company for the year 20y2 is as under

• There is increase incest of goods sold percentage compare to year20y1 so ultimately decrease in gross profit
• We can also see there is increase in the operating expanses of the company at a higher rate then increase in the sales rate