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	$736,600			$580,000
Cost of goods sold	607,600			490,000
Gross profit	$129,000			$90,000
Selling expenses	$37,440			$32,000
Administrative expenses	33,750			27,000
Total operating expenses	$71,190			$59,000
Income before income tax	$57,810			$31,000
Income tax expenses	23,100			12,400
Net income	$34,710			$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	$736,600	$580,000	$	%
Cost of goods sold	607,600	490,000		%
Gross profit	$129,000	$90,000	$	%
Selling expenses	$37,440	$32,000	$	%
Administrative expenses	33,750	27,000		%
Total operating expenses	$71,190	$59,000	$	%
Income before income tax	$57,810	$31,000	$	%
Income tax expense	23,100	12,400		%
Net income	$34,710	$18,600	$	%

b. The net income for Winthrop Company increased between years. This increase was the combined result of an ___ in sales 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

SOLUTION

A.

	Current year Amount ($)	Previous year Amount ($)	Increase (Decrease) Amount ($)	Increase (Decrease) Percent (%)
Sales	736,600	580,000	156,600	27%
Cost of goods sold	607,600	490,000	117,600	24%
Gross profit	129,000	90,000	39,000	43.3%
Selling expenses	37,440	32,000	5,440	17%
Administrative expenses	33,750	27,000	6,750	25%
Total operating expenses	71,190	59,000	12,190	20.7%
Income before income tax	57,810	31,000	26,810	86.5%
Income tax expense	23,100	12,400	10,700	86.3%
Net income	34,710	18,600	16,110	86.7%

B. The net income for Winthrop Company increased between years. This increase was the combined result of an increase in sales and  percentage decrease in cost of goods sold. The cost of goods sold increased at a 24% rate than the increase in sales, thus causing the percentage increase in gross profit to be more than the percentage increase in sales.