Question

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? Complete this question by entering your answers in the tabs below. Reason for Income Statement Decline in Net Income Express the following comparative income statements in common-size percents. (Round your percentage answers to 1 decimal place.) GOMEZ CORPORATION Comparative Income Statements For Years Ended December 31 Current Year Prior Year % $ % $ Sales Cost of goods Gross profit Operating expenses Net income $ 740,000 560,300 179,700 128.200 $ 51,500 $625,000 290,800 334,200 218,500 $ 115,700 Income Statement Reason for Decline in Net Income >

Answer 1

Ans. 1	GOMEZ   CORPORATION
	Comparative Income Statements
	For Years Ended December 31
		Current   Year	Prior Year
		$	%	$	%
	Sales	$740,000	100.0%	$625,000	100.0%
	Cost of goods sold	$560,300	75.7%	$290,800	46.5%
	Gross profit	$179,700	24.3%	$334,200	53.5%
	Operating expenses	$128,200	17.3%	$218,500	35.0%
	Net income	$51,500	7.0%	$115,700	18.5%
	*In a common size income statement, all percentages are calculated on the base of sales.
	Amount is percentage for current year =   Particular amount of current year / Sales * 100
	Amount is percentage for prior year =   Particular amount of prior year / Sales * 100
Ans. 2	Using the common size percentages, Cost of goods sold is the most resonsible item for the decline in net income.
	Explanations:
	In prior year, the cost of goods sold is 46.5% of sales and in current year the cost of goods sold is increased upto
	75.7% of sales. Increase in cost of goods sold results in a decrease in gross profit. Thus, the net income is decreased
	in current year.