Question

Perform a horizontal analysis of the income statements below, showing changes in dollars and percentages (rounded to the nearest whole percentage). Determine if changes are favorable or unfavorable.

Answer 1

To perform a horizontal analysis of income statements, you compare the numbers for different periods to identify changes in dollars and percentages. In this example, the income increased from Year 1 to Year 2, resulting in a favorable change of 41.27%.

Step-by-step explanation:

To perform a horizontal analysis of income statements, you compare the numbers for different periods to identify changes in dollars and percentages. Let's say we have two income statements: one for Year 1 with an income of $25,000 and one for Year 2 with an income of $38,000.

First, calculate the dollar change by subtracting the income of Year 1 from the income of Year 2: $38,000 - $25,000 = $13,000. Next, calculate the percentage change by dividing the dollar change by the average of the two incomes and multiplying by 100: ($13,000 / (($38,000 + $25,000)/2)) * 100 = 41.27%.

In this case, the change is favorable because the income increased from Year 1 to Year 2.