Reporting Income Statement Elements

a. Gross profit as a percentage of Orion Company’s sales has declined from 20 percent to 15 percent over the past three years. Has cost of goods sold been increasing or decreasing relative to sales during these years? Explain.

b. Reclassify the expenses of Company B so the operating incomes of Company A and Company B may be compared.
After the reclassification, determine which company has the highest operating income as a percentage of sales.

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Revenues Company A Income Statement Year Ended December 31, 2000 Cost of goods sold Gross profit Selling & administrative expenses Operating Income Other income and expense: Interest income Income tax expense Other gains & losses Net Income $ 20,000 $1,000,000 (600,000) $ 400,000 (100,000) $ 300,000 (150,000) (30,000) (160,000) $ 140,000 Revenues Company B Income Statement Year Ended December 31, 2000 Cost of goods sold Selling and administrative expenses Interest expense Other losses Income tax expense Special provision for reorganization Net Income $2,500,000 (1,300,000) (550,000) (25,000) (50,000) (200,000) (35,000) $ 340,000