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Horizontal Analysis of the Income Statement

Income statement data for Winthrop Company for two recent years ended December $31$ are as follows:

Current Year Previous Year

Sales $$2,280,000$ $$2,000,000$

Cost of merchandise sold $1,960,0001,750,000$

Gross profit $$320,000$ $$250,000$

Selling expenses $$156,500$ $$125,000$

Administrative expenses $122,000100,000$

Total operating expenses $$278,500$ $$225,000$

Income before income tax expense $$41,500$ $$25,000$

Income tax expenses $16,60010,000$

Net income $$24,900$ $$15,000$

Question Content Area

a$.$ Prepare a comparative income statement with horizontal analysis, indicating the increase $($decrease$)$ for the current year when compared with the previous year. If required, round to one decimal place.

Winthrop Company

Comparative Income Statement

For the Years Ended December $31$

Current

year

Amount Previous

year

Amount Increase

$($Decrease$)$

Amount Increase

$($Decrease$)$

Percent

Sales $$2,280,000$ $$2,000,000$ $fill in the blank $540$e$41$fa$603$bfb$5\_1$

fill in the blank $540$e$41$fa$603$bfb$5\_2$

$\%$

Cost of merchandise sold $1,960,0001,750,000$ fill in the blank $540$e$41$fa$603$bfb$5\_3$

fill in the blank $540$e$41$fa$603$bfb$5\_4$

$\%$

Gross profit $$320,000$ $$250,000$ $fill in the blank $540$e$41$fa$603$bfb$5\_5$

fill in the blank $540$e$41$fa$603$bfb$5\_6$

$\%$

Selling expenses $$156,500$ $$125,000$ $fill in the blank $540$e$41$fa$603$bfb$5\_7$

fill in the blank $540$e$41$fa$603$bfb$5\_8$

$\%$

Administrative expenses $122,000100,000$ fill in the blank $540$e$41$fa$603$bfb$5\_9$

fill in the blank $540$e$41$fa$603$bfb$5\_10$

$\%$

Total operating expenses $$278,500$ $$225,000$ $fill in the blank $540$e$41$fa$603$bfb$5\_11$

fill in the blank $540$e$41$fa$603$bfb$5\_12$

$\%$

Income before income tax expense $41,50025,000$ fill in the blank $540$e$41$fa$603$bfb$5\_13$

fill in the blank $540$e$41$fa$603$bfb$5\_14$

$\%$

Income tax expense $16,60010,000$ fill in the blank $540$e$41$fa$603$bfb$5\_15$

fill in the blank $540$e$41$fa$603$bfb$5\_16$

$\%$

Net income $$24,900$ $$15,000$ $fill in the blank $540$e$41$fa$603$bfb$5\_17$

fill in the blank $540$e$41$fa$603$bfb$5\_18$

$\%$

Question Content Area

b$.$ The net income for Winthrop Company increased between years. This increase was the combined result of an

in sales and

percentage

in cost of merchandise sold. The cost of merchandise sold increased at a

rate than the increase in sales, thus causing the percentage increase in gross profit to be

than the percentage increase in sales.