Question

Exercise 13-4 Computing and interpreting common-size percents LO P2

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

Solution

GOMEZ CORPORATION
Comparative income statement
For the year ended December 31, 2017 and 2016
	2017		2016
	$	%	$	%
Sales	$ 795,000	100.0%	$ 665,000	100.0%
Cost of goods sold	$ 562,700	70.8%	$ 288,800	43.4%
Gross profit	$ 232,300	29.2%	$ 376,200	56.6%
Operating expense	$ 128,000	16.1%	$ 274,400	41.3%
Net income	$ 104,300	13.1%	$ 101,800	15.3%

Requirement 2

Net Income decrease because of increase in Cost of goods sold. Although Operating expense decrease in 2017 as comparison to year 2016 but the magnitude of decrease is not enough to cover the Increase in Cost of goods sold in 2017.