Question

Express the following comparative income statements in common-size percents. Using the common-size percentages, which item is most responsible for the decline in net income?

Answer 1

	Current year		Prior year
	(i)	(i) / $740000	(ii)	(ii) / $625000
Sales	$       7,40,000	100.0%	$       6,25,000	100.0%
Cost of goods sold	$       5,60,300	75.7%	$       2,90,800	46.5%
Gross Profit	$       1,79,700	24.3%	$       3,34,200	53.5%
Operating expenses	$       1,28,200	17.3%	$       2,18,500	35.0%
Net Income	$           51,500	7.0%	$       1,15,700	18.5%
Item responsible for decline in Net Income	=	Cost of goods sold
As cost of goods sold holds the share of 46.5% in previous year which rises to 75.7% in current year which is the main reason for decrease in Net Income

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