Question

Income statement data for Winthrop Company for two recent years ended December 31 are as follows:

Current Year Previous Year
Sales $2,240,000 $2,000,000
Cost of goods sold (1,925,000) (1,750,000)
Gross profit $315,000 $250,000
Selling expenses $(152,500) $(125,000)
Administrative expenses (118,000) (100,000)
Total operating expenses $(270,500) $(225,000)
Income before income tax expense $44,500 $25,000
Income tax expense (17,800) (10,000)
Net income $26,700 $15,000
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 $2,240,000 $2,000,000 $fill in the blank 046aeef91077033_1 fill in the blank 046aeef91077033_2%
Cost of goods sold (1,925,000) (1,750,000) fill in the blank 046aeef91077033_3 fill in the blank 046aeef91077033_4%
Gross profit $315,000 $250,000 $fill in the blank 046aeef91077033_5 fill in the blank 046aeef91077033_6%
Selling expenses $(152,500) $(125,000) fill in the blank 046aeef91077033_7 fill in the blank 046aeef91077033_8%
Administrative expenses (118,000) (100,000) fill in the blank 046aeef91077033_9 fill in the blank 046aeef91077033_10%
Total operating expenses $(270,500) $(225,000) $fill in the blank 046aeef91077033_11 fill in the blank 046aeef91077033_12%
Income before income tax expense $44,500 $25,000 $fill in the blank 046aeef91077033_13 fill in the blank 046aeef91077033_14%
Income tax expense (17,800) (10,000) fill in the blank 046aeef91077033_15 fill in the blank 046aeef91077033_16%
Net income $26,700 $15,000 $fill in the blank 046aeef91077033_17 fill in the blank 046aeef91077033_18
b. The net income for Winthrop Company increased between years. This increase was the combined result of an increase in sales and a lower percentage increase in cost of goods sold. The cost of goods sold increased at a slower rate than the increase in sales, thus causing the percentage increase in gross profit to be greater than the percentage increase in sales.

Answer 1

A. Net income increased by 78.0%

B. The net income increased by 78.0% between years. This increase was the combined result of INCREASE in sales and DECREASE in percentage of Cost of goods sold . The cost of goods sold increased at a LOWER rate than increase in sales causing the percentage increase in gross profit to be HIGHER than the percentage increase in sales.

Step-by-step explanation:

A. Preparation of a comparative income statement with horizontal analysis, indicating the increase (decrease)

Winthrop Company

Comparative Income Statement

For the Years Ended December 31

Current Previous Increase Increase

year year (Decrease) (Decrease)

Amount Amount Amount Percent

Sales $ 2,240,000-$ 2,000,000=$ 240,000 12.0%

($ 240,000/$ 2,000,000=12%)

Cost of goods sold$ 1,925,000- $ 1,750,000= $ 175,000 10.0%

($ 175,000/$ 1,750,000)

Gross profit $ 315,000-$ 250,000=$ 65,000 26.0%

($ 65,000/$ 250,000=26.0%)

Selling expenses $ 152,500-$ 125,000=$ 27,500 22.0%

($ 27,500/$ 125,000=22.0%)

Administrative expenses $ 118,000-$ 100,000=$ 18,000 18.0%

($ 18,000/$ 100,000=18.0%)

Total operating expenses $ 270,500-$ 225,000=$ 45,500 20.2%

($ 45,500/$ 225,000=20.2%)

Income before income tax $ 44,500-$ 25,000 =$ 19,500 78.0%

($ 19,500/$ 25,000=78.0%)

Income tax expense $ 17,800-$ 10,000 =$ 7,800 78.0%

($ 7,800/$ 10,000=78.0%)

Net income $ 26,700 -$ 15,000=$ 11,700 78.0%

($ 44,500-$ 17,800=$ 26,700)

($25,000-$10,000=$15,000)

($ 11,700/$ 15,000=78.0%)

b.The net income increased by 78.0% between years. This increase was the combined result of INCREASE in sales and DECREASE in percentage of Cost of goods sold . The cost of goods sold increased at a LOWER rate than increase in sales causing the percentage increase in gross profit to be HIGHER than the percentage increase in sales