For 2016, Clapton Company reported a decline in net income. At the end of the year, S. Hand, the president, is presented with the following condensed comparative income statement:

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Clapton Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1		2016	2015
2	Sales	$7,392,000.00	$6,600,000.00
3	Cost of goods sold	2,728,000.00	2,200,000.00
4	Gross profit	$4,664,000.00	$4,400,000.00
5	Selling expenses	$1,257,300.00	$990,000.00
6	Administrative expenses	742,950.00	585,000.00
7	Total operating expenses	$2,000,250.00	$1,575,000.00
8	Income from operations	$2,663,750.00	$2,825,000.00
9	Other income	143,000.00	130,000.00
10	Income before income tax	$2,806,750.00	$2,955,000.00
11	Income tax expense	70,200.00	60,000.00
12	Net income	$2,736,550.00	$2,895,000.00

Required:

1.

Prepare a comparative income statement with horizontal analysis for the two-year period, using 2015 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.

2.

To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis.

Prepare a comparative income statement with horizontal analysis for the two-year period, using 2015 as the base year. Use the minus sign to indicate an amount or percent decrease. If required, round percentages to one decimal place.

Question not attempted.

Clapton Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1				Increase (Decrease)	Increase (Decrease)
2		2016	2015	Amount	Percent
3	Sales	$7,392,000.00	$6,600,000.00
4	Cost of goods sold	2,728,000.00	2,200,000.00
5	Gross profit	$4,664,000.00	$4,400,000.00
6	Selling expenses	$1,257,300.00	$990,000.00
7	Administrative expenses	742,950.00	585,000.00
8	Total operating expenses	$2,000,250.00	$1,575,000.00
9	Income from operations	$2,663,750.00	$2,825,000.00
10	Other income	143,000.00	130,000.00
11	Income before income tax	$2,806,750.00	$2,955,000.00
12	Income tax expense	70,200.00	60,000.00
13	Net income	$2,736,550.00	$2,895,000.00

Solution

Clapton Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1				Increase (Decrease)	Increase (Decrease)
2		2016	2015	Amount	Percent
3	Sales	$7,392,000.00	$6,600,000.00
4	Cost of goods sold	2,728,000.00	2,200,000.00
5	Gross profit	$4,664,000.00	$4,400,000.00
6	Selling expenses	$1,257,300.00	$990,000.00
7	Administrative expenses	742,950.00	585,000.00
8	Total operating expenses	$2,000,250.00	$1,575,000.00
9	Income from operations	$2,663,750.00	$2,825,000.00
10	Other income	143,000.00	130,000.00
11	Income before income tax	$2,806,750.00	$2,955,000.00
12	Income tax expense	70,200.00	60,000.00
13	Net income	$2,736,550.00	$2,895,000.00

Points:

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Final Question

To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis.

Net income has selector 1

increased

decreased

from 2015 to 2016. Sales have selector 2

increased

decreased

; however, the cost of goods sold has selector 3

increased

decreased

by a selector 4

smaller

larger

percentage, causing the gross profit to selector 5

decrease

increase

at a slower pace than sales.

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