Question

For 20Y2, McDade Company reported a decline in net income. At the end of the year, T. Burrows, the president, is presented with the following condensed comparative income statement:

Question not attempted.
McDade Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
1 20Y2 20Y1
2 Sales $16,800,000.00 $15,000,000.00
3 Cost of goods sold 11,500,000.00 10,000,000.00
4 Gross profit $5,300,000.00 $5,000,000.00
5 Selling expenses $1,770,000.00 $1,500,000.00
6 Administrative
expenses 1,220,000.00 1,000,000.00
7 Total operating
expenses $2,990,000.00 $2,500,000.00
8 Income from
operations $2,310,000.00 $2,500,000.00
9 Other income 256,950.00 225,000.00
10 Income before
income tax $2,566,950.00 $2,725,000.00
11 Income tax expense 1,413,000.00 1,500,000.00
12 Net income $1,153,950.00 $1,225,000.00
1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.
2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).

Answer 1

The horizontal analysis reveals a 12.0% increase in sales but a higher rate of increase in COGS and operating expenses, leading to a 5.8% decrease in net income for 20Y2 compared to 20Y1.

Step-by-step explanation:

To prepare a comparative income statement with horizontal analysis using 20Y1 as the base year, we calculate the dollar change for each item by subtracting the 20Y1 amount from the 20Y2 amount. We also calculate the percentage change by dividing the dollar change by the 20Y1 amount and multiplying by 100.

Sales:

Dollar Change: $16,800,000 - $15,000,000 = $1,800,000

Percentage Change: ($1,800,000 / $15,000,000) * 100 = 12.0%

Cost of Goods Sold (COGS):

Dollar Change: $11,500,000 - $10,000,000 = $1,500,000

Percentage Change: ($1,500,000 / $10,000,000) * 100 = 15.0%

Net Income:

Dollar Change: $1,153,950 - $1,225,000 = -$71,050

Percentage Change: (-$71,050 / $1,225,000) * 100 = -5.8%

The horizontal analysis shows that while sales increased by 12.0%, the cost of goods sold and operating expenses increased at a higher rate, thus reducing the net income by 5.8%. The increase in COGS and operating expenses indicates that the company might not have been as effective in controlling costs or that there were external factors causing costs to rise. The overall decline in net income suggests that the strategies used may not have been optimal for profit growth in the period analyzed.

Answer 2

Answer: The answers have been provided below

Step-by-step explanation:

a. A comparative income statement with horizontal analysis for the two-year period, while using 20Y1 as the base year have been analysed and attached. In the picture attached, the increase or decrease in the amount was gotten from the year 20Y2 and 20Y1.

For example for sales,

Sales 20Y2 = $16,800,000.00

Sales 20Y1 = $15,000,000.00

Amount = $16,800,000.00 - $15,000,000.00 = $1,800,000

Percentage increase = ($1,800,000 ÷ $15,000,000)× 100 = 12%

The same method was applicable to every other figures.

b. We can see that the sales for year 20y2 rose by 12% even though the net income has a negative value of -5.8%.

We can see that there is also a rise in operating expenses of the firm at a higher rate than the increase in the sales rate of the company. The income from operation also reduced by 7.6%. These are some of the reasons which led to the negative net income.