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	$878,400			$720,000
   Cost of goods sold	725,900			610,000
   Gross profit	$152,500			$110,000
   Selling expenses	$42,560			$38,000
   Administrative expenses	38,400			32,000
   Total operating expenses	$80,960			$70,000
   Income before income tax	$71,540			$40,000
   Income tax expenses	28,600			16,000
   Net income	$42,940			$24,000

   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	$878,400	$720,000	$	%
   Cost of goods sold	725,900	610,000		%
   Gross profit	$152,500	$110,000	$	%
   Selling expenses	$42,560	$38,000	$	%
   Administrative expenses	38,400	32,000		%
   Total operating expenses	$80,960	$70,000	$	%
   Income before income tax	$71,540	$40,000	$	%
   Income tax expense	28,600	16,000		%
   Net income	$42,940	$24,000	$	%

   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.

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Answer 1

Answer to A :
Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year amount	Previous year amount	Increase/Decrease Amount	Increase/Decrease Percentage
Sales	8,78,400	7,20,000	1,58,400	22%
Cost of goods sold	7,25,900	6,10,000	1,15,900	19%
Gross Profit	1,52,500	1,10,000	42,500	39%
Selling expenses	42,560	38,000	4,560	12%
Administrative expenses	38,400	32,000	6,400	20%
Total operating expenses	80,960	70,000	10,960	16%
Income before income tax	71,540	40,000	31,540	79%
Income tax expense	28,600	16,000	12,600	79%
Net Income	42,940	24,000	18,940	79%
Answer to B :
The net income for Winthrop company increased between years. The increase was a combined result of an 22% increase in sales and 19 percentage increase in cost of goods sold. The cost of goods sold increased at a lower rate than increase in sales, thus casuing the percentage increase in gross profit to be more than the percentage increase in sales.