Question

1. 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	$800,000			$640,000
   Cost of goods sold	676,500			550,000
   Gross profit	$123,500			$90,000
   Selling expenses	$35,650			$31,000
   Administrative expenses	31,980			26,000
   Total operating expenses	$67,630			$57,000
   Income before income tax	$55,870			$33,000
   Income tax expenses	22,300			13,200
   Net income	$33,570			$19,800

   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	$800,000	$640,000	$	%
   Cost of goods sold	676,500	550,000		%
   Gross profit	$123,500	$90,000	$	%
   Selling expenses	$35,650	$31,000	$	%
   Administrative expenses	31,980	26,000		%
   Total operating expenses	$67,630	$57,000	$	%
   Income before income tax	$55,870	$33,000	$	%
   Income tax expense	22,300	13,200		%
   Net income	$33,570	$19,800	$	%

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

   • increase
   • decrease
   in sales and
   • higher
   • lower
   percentage
   • increase
   • decrease
   in cost of goods sold. The cost of goods sold increased at a
   • slower
   • faster
   rate than the increase in sales, thus causing the percentage increase in gross profit to be
   • greater
   • less
   than the percentage increase in sales.

Answer 1

--Requirement 'a'

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current	Previous	Increase	Increase
	year	year	(Decrease)	(Decrease)
	Amount	Amount	Amount	Percent
Sales	$800,000	$640,000	$160,000	25.0%
Cost of goods sold	$676,500	$550,000	$126,500	23.0%
Gross profit	$123,500	$90,000	$33,500	37.2%
Selling expenses	$35,650	$31,000	$4,650	15.0%
Administrative expenses	$31,980	$26,000	$5,980	23.0%
Total operating expenses	$67,630	$57,000	$10,630	18.6%
Income before income tax	$55,870	$33,000	$22,870	69.3%
Income tax expense	$22,300	$13,200	$9,100	68.9%
Net income	$33,570	$19,800	$13,770	69.5%

--Requirement 'b'

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