Question

PR 17-1B Horizontal analysis of income statement OBJ. 2 For 20Y2, Macklin Inc. reported a significant increase in net income. At the end of the year, John Mayer, the president, is presented with the following condensed comparative income statement: Macklin Inc. Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1 Sales................................................................. Costofgoodssold..................................................... Grossprofit........................................................... Sellingexpenses...................................................... Administrativeexpenses............................................... Totaloperatingexpenses .............................................. Incomefromoperations............................................... Otherrevenue........................................................ Incomebeforeincometax ............................................. Incometaxexpense................................................... Netincome........................................................... Instructions 20Y2 $910,000 441,000 $469,000 $ 139,150 99,450 $238,600 $230,400 65,000 $295,400 65,000 $230,400 20Y1 $700,000 350,000 $350,000 $115,000 85,000 $200,000 $150,000 50,000 $200,000 50,000 $150,000 1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 as the base year. Round percentages to one decimal place. 2. To the extent the data permit, comment on the significant relationships re- vealed by the horizontal analysis prepared in (1

Answer 1

Horizontal Analysis

	20Y2	20Y1	% change
Sales	$9,10,000	$7,00,000	30.0%
COGS	$4,41,000	$3,50,000	26.0%
Gross profit	$4,69,000	$3,50,000	34.0%
selling expenses	$1,39,150	$1,15,000	21.0%
administrative expenses	$99,450	$85,000	17.0%
total operating expenses	$2,38,600	$2,00,000	19.3%
Income from continuing operations	$2,30,400	$1,50,000	53.6%
other revenue	$65,000	$50,000	30.0%
income before tax	$2,95,400	$2,00,000	47.7%
income tax expense	$65,000	$50,000	30.0%
net income	$2,30,400	$1,50,000	53.6%

From the above statement, we see that the net income has increased by more than 50%. This is due to an increase in sale by 30% and also an increase in other revenue by 30%. The corresponding expenses have not increased in the sale proportion, like COGS has increased by only 26% and pther expenses also increased by less than 20%. Thus leading to an incresase in net income.