Question

Horizontal Analysis for Income Statement

For 20Y3, Greyhound Technology Company reported its most significant decline in net income in years. At the end of the year, Duane Vogel, the president, is presented with the following condensed comparative income statement:

GREYHOUND TECHNOLOGY COMPANY Comparative Income Statement For the Years Ended December 31, 20Y3 and 20Y2
	20Y3		20Y2
Sales	$ 598,172		$ 522,000
Cost of goods sold	(429,000)		(330,000)
Gross profit	$ 169,172		$ 192,000
Selling expenses	$ (60,500)		$ (44,000)
Administrative expenses	(35,560)		(28,000)
Total operating expenses	$ (96,060)		$ (72,000)
Income from operations	$ 73,112		$ 120,000
Other income	2,697		2,200
Income before income tax	$ 75,809		$ 122,200
Income tax expense	(21,200)		(36,700)
Net income	$ 54,609		$ 85,500

Instructions:

1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y2 as the base year. Enter decreases as negative amounts and negative percentages. Round percentage changes to one decimal place.

Greyhound Technology Company
Comparative Income Statement
For the Years Ended December 31, 20Y3 and 20Y2
	20Y3	20Y2	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$598,172	$522,000	$	%
Cost of goods sold	(429,000)	(330,000)		%
Gross profit	$169,172	$192,000	$	%
Selling expenses	$(60,500)	$(44,000)	$	%
Administrative expenses	(35,560)	(28,000)		%
Total operating expenses	$(96,060)	$(72,000)	$	%
Income from operations	$73,112	$120,000	$	%
Other income	2,697	2,200		%
Income before income tax	$75,809	$122,200	$	%
Income tax expense	(21,200)	(36,700)		%
Net income	$54,609	$85,500	$	%

2. Based on the horizontal analysis prepared in 1 which of the following statements is correct?
a. Net income declined from 20Y2 to 20Y3.
b. Sales increased, but the cost of goods also increased causing gross profit to decline.
c. Other revenues decreased slightly and income tax expense increased.
d. Over all there is decline in net income.

Answer 1

Greyhound Technology Company Comparative Income Statement For the Years Ended December 31, 20Y3 and 20Y2 Increase Increase 2043 2012 (Decrease) (Decrease) Amount Percent Sales S 598,172S 522,000 76,1721 14.6% Cost of goods sold $ 429,000 S 330,000 99,000 30.0% Gross profit $ 169,172S 192,000 (22,828) -11.9% Selling expenses S 60,500S 44,000 16,500 37.5% Administrative expenses S 35,560 S 28,000 7,560 27.0% Total operating expenses S 96,060 S 72,000 24,060 33.4% Income from operations S 73,112 | $ 120,000 (46.888) Other income 2,697 S 2,200 497 22.6% Income before income tax S 75,809 S 122,200 (46,391) Income tax expense S 21,200 S 36,700 (15,500) 42.2% Net income S 54,609 S 85,500 (30,891) -36.1%

Under horizontal system of analysis, 20X2 is take as the base year while calculating percentages.

Answer |d. Over all there is decline in net income. The reason for decrease in profits even after increase in sales is increase in cost of goods sold, operating expenses and income tax and slight decrease in other revenues. Because of all the above factors , the overall net income decreased from 20X2 to 20X3.