Question

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	$496,100			$410,000
Cost of goods sold	401,200			340,000
Gross profit	$94,900			$70,000
Selling expenses	$26,640			$24,000
Administrative expenses	23,800			20,000
Total operating expenses	$50,440			$44,000
Income before income tax	$44,460			$26,000
Income tax expenses	17,800			10,400
Net income	$26,660			$15,600

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	$496,100	$410,000	$	%
Cost of goods sold	401,200	340,000		%
Gross profit	$94,900	$70,000	$	%
Selling expenses	$26,640	$24,000	$	%
Administrative expenses	23,800	20,000		%
Total operating expenses	$50,440	$44,000	$	%
Income before income tax	$44,460	$26,000	$	%
Income tax expense	17,800	10,400		%
Net income	$26,660	$15,600	$	%

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.

Answer 1

Requirement: A Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total Operating expenses Income before Income tax Income tax expense Net Income Winthrop Company Comparative Income Statements For the year Ended December 31 Current Year Previous Year Increase (Decrease) Amount Amount Amount Percentage 496100 410000 861001 21.0 % 401200 340000 61200 18.0 % 94900 70000 24900 35.6 % 26640 24000 2640 11.0 % 23800 20000 3800 19.0% 50440 44000 6440 14.6 % 44460 26000 18460 71.0 % 17800 10400 7400 71.2 % 26660 15600 11060 70.9% Percentage = (Increase or Decrease amount / Base year amount) "100 Requirement: B The Net Income for Winthrop Company increased by 70.9% between years. This increase was the combined result of an increase in sales of 21.0% and 18 percentage increase in cost of goods sold. The Cost of goods sold increased at a Less rate than the increase in sales, thus causing the percentage increase in gross profit to be greater than the percentage increase in sales.