Question

Exercise 12-61
Horizontal Analysis of Income Statements

Consolidated income statements for Karofsky Computer follow.

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Hide 1. Prepare common size income statements for horizontal analysis. Enter your answers in percentage terms, rounded to two decimal places, and do not include the "%" sign with your answer. For example, "100.00" or "28.72". Use minus sign to enter negative values. You do not need to include the actual dollar amounts shown above. If an amount is zero, enter "0". Karofsky Computer Inc. Consolidated Income Statements 2011 2010 2009   %   %   % Costs and expenses:   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   %   % Net income   %   %   %   %   %   %

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Set up all three years side by side in income statement form. Start with 2009, setting 100% for every line amount. Then the corresponding amount in the other years is compared to the base year. For example 2011, cost of goods sold = 6,844,915/3,991,337 = 171.49%.

2. Explain why net income decreased in 2010 and increased in 2011.

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Answer 1

(1)

(2) Net income decreased in 2010 due to :

2010 2011 100 Karofsky Computer Inc. Consolidated Income Statements Three fiscal Yearts ended Dec 31 2009 Particulars Sales 129.66 113.56 Cost arod Expeosas. cost of goods sold: 171.49 Research & Developroest 93.72 Selling. Geseal, podria strative 82.03 96.75 Restructuring cost of other 131.50 100 110.37 100 100 NA- NA 137.98 125.24 100 64.81 Operating locore: Interest and others Incore, bet 13.69 59.07 -4430 100 58.48 16.32 Income before income tances, Provision for income taxes 58.48 16.32 100 Net Income 58.48 16.32 loo Earnings per coronoos equivalent share : & cororoon 16.86 60.07 loo

• Cost of goods proportionate to the sales increased in 2010.   

	Sales	COGS	% COGS/Sales
2009	7086542	3991337	56.32%
2010	7976954	5248834	65.80%

There was an increase of almost 9.48% in cost of goods sold compared to sales. This is the main reason for reduction in profit. Eventhough other expenses proportionate to sales had decreased in 2010, the net profit had reduced due to this reason. Additionally there was an decrease of $ 20,313 in 2010

Net income increased in 2011

• There was an increase in sales in 2011 compared to year  2010 by 15%
• There was an decrease of expenses in' research and development'(100261), and ' selling, general and administrative expenses' (248251)