Question

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 $740,000 $625,000
Cost of goods sold 560,300 290,800
Gross profit 179,700 334,200
Operating expenses 128,200 218,500
Net income $51,500 $115,700

Required:
Using the common-size percentages, which item is most responsible for the decline in net income?

Answer 1

Answer: Cost of Goods sold

Step-by-step explanation:

Common size analysis refers to making all entries in the income statement, a percentage of sales for that year.

Current Year Prior Year

Sales 100% 100%

Cost of Goods sold 75.7% 46.5%

Gross Profit 24.3% 53.5%

Operating expenses 17.3% 35%

Net Income 7.0% 18.5%

Looking at the percentages above, one can see that the COGS increased the most from the previous year by going from 46.5% to 75.7% representing an increase of 29.2%.

This had the most impact on Net income as it substantially reduced Gross profit.