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	$960,000			$750,000
Cost of merchandise sold	812,500			650,000
Gross profit	$147,500			$100,000
Selling expenses	$43,660			$37,000
Administrative expenses	39,060			31,000
Total operating expenses	$82,720			$68,000
Income before income tax expense	$64,780			$32,000
Income tax expenses	25,900			12,800
Net income	$38,880			$19,200

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	$960,000	$750,000	$fill in the blank 329dc90a7fb7013_1	fill in the blank 329dc90a7fb7013_2%
Cost of merchandise sold	812,500	650,000	fill in the blank 329dc90a7fb7013_3	fill in the blank 329dc90a7fb7013_4%
Gross profit	$147,500	$100,000	$fill in the blank 329dc90a7fb7013_5	fill in the blank 329dc90a7fb7013_6%
Selling expenses	$43,660	$37,000	$fill in the blank 329dc90a7fb7013_7	fill in the blank 329dc90a7fb7013_8%
Administrative expenses	39,060	31,000	fill in the blank 329dc90a7fb7013_9	fill in the blank 329dc90a7fb7013_10%
Total operating expenses	$82,720	$68,000	$fill in the blank 329dc90a7fb7013_11	fill in the blank 329dc90a7fb7013_12%
Income before income tax expense	$64,780	$32,000	$fill in the blank 329dc90a7fb7013_13	fill in the blank 329dc90a7fb7013_14%
Income tax expense	25,900	12,800	fill in the blank 329dc90a7fb7013_15	fill in the blank 329dc90a7fb7013_16%
Net income	$38,880	$19,200	$fill in the blank 329dc90a7fb7013_17	fill in the blank 329dc90a7fb7013_18%

Question Content Area

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

increasedecrease

in sales and

higherlower

percentage

increasedecrease

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

slowerfaster

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

greaterless

than the percentage increase in sales.