Question

Express the following comparative income statements in common-size percents. Using the common-size percentages, which item is most responsible for the decline in net income?

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	$730,000		$640,000
Cost of goods sold	565,400		288,800
Gross profit	164,600		351,200
Operating expenses	128,000		261,200
Net income	$36,600		$90,000

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

Answer 1

	GOMEZ CORPORATION Comparative Income Statements For Years Ended December 31 Current Year Prior Year $ % $ % Sales $730,000 100% $640,000 100% Cost of goods sold 565,400 77.5% 288,800 45.1% Gross profit 164,600 22.5% 351,200 54.9% Operating expenses 128,000 17.5% 261,200 40.8% Net income $36,600 5% $90,000 14.1%

In the prior year, cost of goods sold was 45.1% of sales but in the current year, cost of goods sold is 77.5% of sales. Thus, cost of goods sold percentage has increased highly in the current year and hence cost of goods sold is most responsible for the decline in net income.

Kindly give a positive rating if you are satisfied with the answer. Feel free to ask if you have any doubt. Thanks