Horizontal Analysis of the Income Statement Income statement data for Winthrop C
ID: 2537807 • Letter: H
Question
Horizontal Analysis of the Income Statement
Income statement data for Winthrop Company for two recent years ended December 31, are as follows:
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.
b. The net income for Winthrop Company increased by 84.4% between years. This increase was the combined result of an in sales of 25% 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.
Current Year Previous Year Sales $725,000 $580,000 Cost of goods sold 597,800 490,000 Gross profit $127,200 $90,000 Selling expenses $36,800 $32,000 Administrative expenses 33,210 27,000 Total operating expenses $70,010 $59,000 Income before income tax $57,190 $31,000 Income tax expenses 22,900 12,400 Net income $34,290 $18,600Explanation / Answer
Explanation for the Answer:
Answer for Part A Winthrop Company Comparative Income Statement For the Years Ended December 31 Particulars Current Previous Increase Increase year year (Decrease) (Decrease) Amount Amount Amount Percent (1) (2) (3) = (4)= (1)-(2) {(3)/(2)}*100 Sales (A) $725,000 $580,000 $145,000 25.0% Cost of goods sold (B) $597,800 $490,000 $107,800 22.0% Gross profit ( C ) = (A) - (B) $127,200 $90,000 $37,200 41.3% Selling expenses (D) $36,800 $32,000 $4,800 15.0% Administrative expenses (E) $33,210 $27,000 $6,210 23.0% Total operating expenses (F) = (D) + (E) $70,010 $59,000 $11,010 18.7% Income before income tax (G) = ( C) - (F) $57,190 $31,000 $26,190 84.5% Income tax expense (H) $22,900 $12,400 $10,500 84.7% Net income (I) = (G) -(H) $34,290 $18,600 $15,690 84.4%Explanation for the Answer:
1 Sales is indicated as (A) 2 Cost of Goods Sold is indicated as (B) 3 To Arrive at Gross Profit ( C), deduct the Cost of Goods sold from Sales i.e. ( A) -(B) 4 Add Selling Expenses ( D) , Administrative Expenses (E) to arrive at Total Operating Expenses (F) 5 Deduct Total operating Expenses arrived above (F) from Gross Profit ( C) to arrive at Income Before Income Tax ( G) 6 Income Tax Expenses are indicated as (H) 7 Net Income (I) is derived by deducting the Income Tax Expenses (H) from Income before Income Tax (G) 1 Current year Amounts are indicated as (1) 2 Previous Year Amounts are indicated as (2) 3 Increase or (decrease) Amount are indicated as (3) , which is deriveby Deducting Previous Year Amounts (2) from Current Year Amounts (1) 4 Increase or (decrease) percent is idncated ad (4), which is derived by dividing Increase (Decrease) Amount (3) by Previous Year Amount (2) multiplying the resulting amount with 100 to arrive the percentage The logic here is to find the amount & percentage of increase (decrease) from Prior year to current year. Hence Previous year amounts are considered as base for arriving the percentage Answer for Part B The net income for Winthrop Company increased by 84.4% between years. This increase was the combined result of an increase in sales of 25% and 22% percentage increase in cost of goods sold. The cost of goods sold increased at a 3% rate less than the increase in sales, thus causing the 41.3 percentage increase in gross profit to be more than the percentage increase in salesRelated Questions
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