For 2016, Clapton Company reported a decline in net income. At the end of the ye
ID: 2525371 • Letter: F
Question
For 2016, Clapton Company reported a decline in net income. At the end of the year, S. Hand, the president, is presented with the following condensed comparative income statement:
Clapton Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
2016
2015
2
Sales
$7,425,600.00
$6,720,000.00
3
Cost of goods sold
2,688,000.00
2,240,000.00
4
Gross profit
$4,737,600.00
$4,480,000.00
5
Selling expenses
$1,096,200.00
$870,000.00
6
Administrative expenses
636,300.00
505,000.00
7
Total operating expenses
$1,732,500.00
$1,375,000.00
8
Income from operations
$3,005,100.00
$3,105,000.00
9
Other income
144,300.00
130,000.00
10
Income before income tax
$3,149,400.00
$3,235,000.00
11
Income tax expense
75,400.00
65,000.00
12
Net income
$3,074,000.00
$3,170,000.00
Income Statement
Prepare a comparative income statement with horizontal analysis for the two-year period, using 2015 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.
Clapton Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
Increase (Decrease)
Increase (Decrease)
2
2016
2015
Amount
Percent
3
Sales
$7,425,600.00
$6,720,000.00
4
Cost of goods sold
2,688,000.00
2,240,000.00
5
Gross profit
$4,737,600.00
$4,480,000.00
6
Selling expenses
$1,096,200.00
$870,000.00
7
Administrative expenses
636,300.00
505,000.00
8
Total operating expenses
$1,732,500.00
$1,375,000.00
9
Income from operations
$3,005,100.00
$3,105,000.00
10
Other income
144,300.00
130,000.00
11
Income before income tax
$3,149,400.00
$3,235,000.00
12
Income tax expense
75,400.00
65,000.00
13
Net income
$3,074,000.00
$3,170,000.00
Final Question
To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis.
Net income has from 2015 to 2016. Sales have ; however, the cost of goods sold has by a percentage, causing the gross profit to at a slower pace than sales.
Clapton Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
Explanation / Answer
Solution: (1)
Clapton Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
Increase (Decrease)
Increase (Decrease)
2
2016
2015
(Base Year)
Amount
Percent
3
Sales
$7,425,600.00
$6,720,000.00
$ 705,600
10.5
4
Cost of goods sold
2,688,000.00
2,240,000.00
$ 448,000
20
5
Gross profit
$4,737,600.00
$4,480,000.00
$ 257,600
5.8
6
Selling expenses
$1,096,200.00
$870,000.00
$ 226,200
26
7
Administrative expenses
636,300.00
505,000.00
$ 131,300
26
8
Total operating expenses
$1,732,500.00
$1,375,000.00
$ 357,500
26
9
Income from operations
$3,005,100.00
$3,105,000.00
-$ 99,900
-3.2
10
Other income
144,300.00
130,000.00
$ 14,300
11
11
Income before income tax
$3,149,400.00
$3,235,000.00
-$85,600
-2.6
12
Income tax expense
75,400.00
65,000.00
$ 10,400
16
13
Net income
$3,074,000.00
$3,170,000.00
-$96,000
-3
Working Note:
1) Formula used for Increase / Decrease in amount
= Current Year amount (2016) –Base Year amount (2015)
2) Formula used for Increase / Decrease in percent
= [Current Year amount (2016) –Base Year amount (2015)] / Base Year amount (2015) X 100
Answer (2):
Net income has reduced from 2015 to 2016. Sales have increased; however, the cost of goods sold has increased by a 20 percentage, causing the gross profit to increase at a slower pace than sales.
Clapton Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
Increase (Decrease)
Increase (Decrease)
2
2016
2015
(Base Year)
Amount
Percent
3
Sales
$7,425,600.00
$6,720,000.00
$ 705,600
10.5
4
Cost of goods sold
2,688,000.00
2,240,000.00
$ 448,000
20
5
Gross profit
$4,737,600.00
$4,480,000.00
$ 257,600
5.8
6
Selling expenses
$1,096,200.00
$870,000.00
$ 226,200
26
7
Administrative expenses
636,300.00
505,000.00
$ 131,300
26
8
Total operating expenses
$1,732,500.00
$1,375,000.00
$ 357,500
26
9
Income from operations
$3,005,100.00
$3,105,000.00
-$ 99,900
-3.2
10
Other income
144,300.00
130,000.00
$ 14,300
11
11
Income before income tax
$3,149,400.00
$3,235,000.00
-$85,600
-2.6
12
Income tax expense
75,400.00
65,000.00
$ 10,400
16
13
Net income
$3,074,000.00
$3,170,000.00
-$96,000
-3
Working Note:
1) Formula used for Increase / Decrease in amount
= Current Year amount (2016) –Base Year amount (2015)
2) Formula used for Increase / Decrease in percent
= [Current Year amount (2016) –Base Year amount (2015)] / Base Year amount (2015) X 100
Answer (2):
Net income has reduced from 2015 to 2016. Sales have increased; however, the cost of goods sold has increased by a 20 percentage, causing the gross profit to increase at a slower pace than sales.
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