Question

Income statements for Gibson Company for Year 3 and Year 4 follow:

GIBSON COMPANY Income Statements
	Year 4				Year 3
Sales	$	200,000			$	180,000
Cost of goods sold		143,400				121,400
Selling expenses		22,000				20,000
Administrative expenses		12,900				14,900
Interest expense		3,800				5,800
Total expenses	$	182,100			$	162,100
Income before taxes		17,900				17,900
Income taxes expense		5,400				3,500
Net income	$	12,500			$	14,400

Required
a. Perform a horizontal analysis, showing the percentage change in each income statement component between Year 3 and Year 4.
b. Perform a vertical analysis, showing each income statement component as a percentage of sales for each year.

Answer 1

a)

GIBSON COMPANY
Horizontal Analysis of income statement
for the year ended december 31
			Change in
	Year 4	Year 3	Dollars	%
	a	b	c = a-b	d = c/b*100
Net sales	$ 200,000	$ 180,000	$ 20,000	11.1%
Cost of goods sold	$ 143,400	$ 121,400	$ 22,000	18.1%
Selling expenses	$    22,000	$    20,000	$    2,000	10.0%
Administrative expense	$    12,900	$    14,900	$ (2,000)	-13.4%
Interest expenses	$      3,800	$      5,800	$ (2,000)	-34.5%
Total expenses	$ 182,100	$ 162,100	$ 20,000	12.3%
Income before income tax	$    17,900	$    17,900	$             -	0.0%
income tax expense	$      5,400	$      3,500	$    1,900	54.3%
net income	$    12,500	$    14,400	$ (1,900)	-13.2%

b)

GIBSON COMPANY
Verticle Analysis of income statement
for the year ended december 31
	Year 4		Year 3
	a	b = a / net sales	a	b = a / net sales
Net sales	$ 200,000	100.0%	$ 180,000	100.0%
Cost of goods sold	$ 143,400	71.7%	$ 121,400	67.4%
Selling expenses	$    22,000	11.0%	$    20,000	11.1%
Administrative expense	$    12,900	6.5%	$    14,900	8.3%
Interest expenses	$      3,800	1.9%	$      5,800	3.2%
Total expenses	$ 182,100	91.1%	$ 162,100	90.1%
Income before income tax	$    17,900	9.0%	$    17,900	9.9%
income tax expense	$      5,400	2.7%	$      3,500	1.9%
net income	$    12,500	6.3%	$    14,400	8.0%

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