Question

Income statement data for Winthrop Company for two recent years ended December 31 are as follows: Current Year Previous YearSales $2,280,000 $2,000,000Cost of goods sold 1,960,000 1,750,000Gross profit $320,000 $250,000Selling expenses $156,500 $125,000Administrative expenses 122,000 100,000Total operating expenses $278,500 $225,000Income before income tax $41,500 $25,000Income tax expense 16,600 10,000Net income $24,900 $15,000A. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. (Round percentages to one decimal place.) B. What conclusions can be drawn from the horizontal analysis?

Answer 1

Answer:

$\left[\begin{array}{cccc}&Current&Base Year&Change\\ Sales &2,280,000&2,000,000&1.14\\ Cost of goods sold&1,960,000&1,750,000&1.12\\ Gross profit&320,000&250,000&1.28\\ Selling expenses&156,500&125,000&1.252\\ Administrative expenses&122,000&100,000&1.22\\ Total operating expenses&278,500&225,000&1.24\\ Income before income tax&41,500&25,000&1.66\\ Income tax expense&16,600&10,000&1.66\\ Net income&24,900&15,000&1.66\\\end{array}\right]$

Explanation:

The horizontal analisys will be a division between the base year (previous) and the current year.

From the data we can guess the following:

As sales increase was greater than cost of good sold the company must have taken a discount from larger purchases

The extra sales were the product of a bigger marketing / selling estrategy as this cost increase above the percentange of sales (increase at the same rate or below would mean that the increase only comes from the commisions not increase advertizing or moe sales persons)

This also lead to more adminsitrative cost which also increases.

Overall:

the company take discount approach with their suppliers and did a new marketing estrategy.