Use the following comparative income statement form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part and on the Profitability Measures part. Compute any missing amounts and complete the horizontal analysis columns. Enter percentages as decimal amounts, rounded to one decimal place. When rounding, look only at the figure to the right of one decimal place. If < 5, round down and if 5, round up. For example, for 32.048% enter 32.0%. For 32.058% enter 32.1%.

Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5

Increase/(Decrease)

20Y6

20Y5

Amount

Percentage

Sales

$fill in the blank ae6a14fe2004f8a_1

$7,267,000

$fill in the blank ae6a14fe2004f8a_2

fill in the blank ae6a14fe2004f8a_3

%

Cost of goods sold

fill in the blank ae6a14fe2004f8a_4

(3,444,000)

fill in the blank ae6a14fe2004f8a_5

fill in the blank ae6a14fe2004f8a_6

%

Gross profit

$fill in the blank ae6a14fe2004f8a_7

$3,823,000

$fill in the blank ae6a14fe2004f8a_8

fill in the blank ae6a14fe2004f8a_9

%

Selling expenses

$fill in the blank ae6a14fe2004f8a_10

$(1,453,200)

$fill in the blank ae6a14fe2004f8a_11

fill in the blank ae6a14fe2004f8a_12

%

Administrative expenses

(1,239,000)

(1,103,000)

fill in the blank ae6a14fe2004f8a_13

fill in the blank ae6a14fe2004f8a_14

%

Total operating expenses

$fill in the blank ae6a14fe2004f8a_15

$(2,556,200)

$fill in the blank ae6a14fe2004f8a_16

fill in the blank ae6a14fe2004f8a_17

%

Operating income

$fill in the blank ae6a14fe2004f8a_18

$1,266,800

$fill in the blank ae6a14fe2004f8a_19

fill in the blank ae6a14fe2004f8a_20

%

Other expense (interest)

fill in the blank ae6a14fe2004f8a_21

(120,600)

fill in the blank ae6a14fe2004f8a_22

fill in the blank ae6a14fe2004f8a_23

%

Income before income tax expense

$fill in the blank ae6a14fe2004f8a_24

$1,146,200

$fill in the blank ae6a14fe2004f8a_25

fill in the blank ae6a14fe2004f8a_26

%

Income tax expense

fill in the blank ae6a14fe2004f8a_27

(179,460)

fill in the blank ae6a14fe2004f8a_28

fill in the blank ae6a14fe2004f8a_29

%

Net income

$fill in the blank ae6a14fe2004f8a_30

$966,740

$fill in the blank ae6a14fe2004f8a_31

fill in the blank ae6a14fe2004f8a_32

%

Question Content Area

Final Questions

Your accountant friend reveals that the company whose information you have been working on is actually a company he is thinking of investing in. What advice and insight do you have for your friend?

Using only the information from your horizontal analysis of the comparative income statement, complete the following sentences.

Net incomeSalesCost of goods soldOther expense (interest)

has decreased significantly from 20Y5 to 20Y6, even though

net incomesalescost of goods soldselling expenses

has increased. However,

net incomesalescost of goods sold

has also

increaseddecreasednot changed

, which slowed the increase in

gross profitnet incomesalestotal operating expenses

. In addition,

selling expensesincome tax expenseother expense (interest)

has increased at a faster rate. The company appears

to be strugglingto be too heavilyleveragedto be a good investmentto be taking the right stepsto be growing

.

Based on these observations, do you recommend that your friend invest in this companys stock?

YesNo