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:

Line Item Description20Y220Y1Sales$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)Operating income$2,310,000 $2,500,000 Other revenue256,950 225,000 Income before income tax expense$2,566,950 $2,725,000 Income tax expense(1,413,000)(1,500,000)Net income$1,153,950 $1,225,000

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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. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Line Item Description 20Y2 20Y1Increase/(Decrease) AmountIncrease/(Decrease) PercentSales$Sales$Sales$SalesSales%Cost of goods soldCost of goods soldCost of goods soldCost of goods soldCost of goods sold%Gross profit$Gross profit$Gross profit$Gross profitGross profit%Selling expenses$Selling expenses$Selling expenses$Selling expensesSelling expenses%Administrative expensesAdministrative expensesAdministrative expensesAdministrative expensesAdministrative expenses%Total operating expenses$Total operating expenses$Total operating expenses$Total operating expensesTotal operating expenses%Operating income$Operating income$Operating income$Operating incomeOperating income%Other revenueOther revenueOther revenueOther revenueOther revenueIncome before income tax expense$Income before income tax expense$Income before income tax expense$Income before income tax expenseIncome before income tax expense%Income tax expenseIncome tax expenseIncome tax expenseIncome tax expenseIncome tax expense%Net income$Net income$Net income$Net incomeNet income%

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2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).

Net income has fill in the blank 1 of 7

declinedincreased

from 20Y1 to 20Y2. Sales have fill in the blank 2 of 7

increaseddecreased

; however, the cost of goods sold has fill in the blank 3 of 7

increaseddecreased

, causing the gross profit to increase at a fill in the blank 4 of 7

slowerfaster

pace than sales. In addition, total operating expenses have fill in the blank 5 of 7

increaseddecreased

at a faster rate than sales. fill in the blank 6 of 7

IncreasesDecreases

in costs and expenses that are higher than the increase in sales have caused the net income to fill in the blank 7 of 7

declineincrease

.