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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Horizontal analysis of income statement

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:

McDade Company

Comparative Income Statement

For the Years Ended December 31, 20Y2 and 20Y1

  20Y2 20Y1
Sales.......................... $16,800,000 $15,000,000
Cost of goods sold.............. 11,500,000 10,000,000
Gross profit.................... $ 5,300,000 $ 5,000,000
Selling expenses............... $ 1,770,000 $ 1,500,000
Administrative expenses........ 1,220,000 $ 1,000,000
Total operating expenses....... $ 2,990,000 $ 2,500,000
Income from operations........ $ 2,310,000 $ 2,500,000
Other revenue................. 256,950 225,000
Income before income tax...... $ 2,566,950 $ 2,725,000
Income tax expense............ 1,413,000 1,500,000
Net income.................... $ 1,153,950 $ 1,225,0000

Instructions

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 revealed by the horizontal analysis prepared in (1).

1.

To determine

Horizontal Analysis

Horizontal analysis refers to the measurement of percentage change in the comparative financial statements. It compares the items from the financial statements from one to the other years, and indicates the trends.

To Prepare: The horizontal analysis of the comparative income statement of Company M for the year 20Y2.

Given info: Income statement for 20Y2 and 20Y1.

Explanation

Following formula is used for computing the change in dollar amount of items in the income statement of 20Y1 and 20Y2, and the percentage change for the respective items.

Change in amount = Amount in 20Y2-Amou

To determine

2.

To comment: Significant relationships revealed by the horizontal analysis.

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