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:
McDade Company Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1 20Y2 20Y1 Sales $ 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 revenue 256,950 225,000 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
1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y1 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 prepared in (1).

1. The calculation of the horizontal analysis of McDade Company's Comparative Income Statement for the Years Ended December 31, 20Y2 and 20Y1 is as follows:

                                                                      20Y2      %                20Y1        %

Sales                                                   $16,800,000   112%  $ 15,000,000 100%

Cost of goods sold                              (11,500,000)  115%    (10,000,000) 100%

Gross profit                                         $ 5,300,000 106%  $ 5,000,000   100%

Selling expenses                                $ (1,770,000) 118% $ (1,500,000)  100%

Administrative expenses                      (1,220,000) 122%    (1,000,000)  100%

Total operating expenses                 $(2,990,000) 120% $(2,500,000)  100%

Operating income                                $2,310,000  92%   $2,500,000   100%

Other revenue                                          256,950  114%         225,000   100%

Income before income tax expense $2,566,950  94%    $2,725,000   100%

Income tax expense                              (1,413,000) 94%     (1,500,000)   100%

Net income                                          $ 1,153,950  94%   $ 1,225,000    100%

The calculation of the Trend Analysis, with two examples is as follows:

Sales = 112% ($16,800,000/$15,000,000 x 100%)

Cost of goods sold = 115% ($11,500,000/$10,000,000 x 100%)

2. The significant relationships revealed by this horizontal analysis showed that sales revenue and gross profit increased by 12% and 6% respectively from 20Y1's figure, this increase did not translate into increased net income.  Instead, the net income decreased by 6% in 20Y2 as a result of increased operating expenses, which witnessed a 20% increase.

Thus, The horizontal analysis of McDade Company's comparative income statement involves the calculation of percentage changes from 20Y1 to the 20Y2.  The dollar amount changes can also be calculated.

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