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. Round percentages to one decimal place. For those boxes in which you must enter subtracted or negative numbers use a minus sign. McDade Company Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1 Increase/(Decrease) 20Y2 20Y1 Amount Percent Sales $fill in the blank 13c617f4b05a06d_1 $fill in the blank 13c617f4b05a06d_2 $fill in the blank 13c617f4b05a06d_3 fill in the blank 13c617f4b05a06d_4% Cost of goods sold fill in the blank 13c617f4b05a06d_5 fill in the blank 13c617f4b05a06d_6 fill in the blank 13c617f4b05a06d_7 fill in the blank 13c617f4b05a06d_8% Gross profit $fill in the blank 13c617f4b05a06d_9 $fill in the blank 13c617f4b05a06d_10 $fill in the blank 13c617f4b05a06d_11 fill in the blank 13c617f4b05a06d_12% Selling expenses $fill in the blank 13c617f4b05a06d_13 $fill in the blank 13c617f4b05a06d_14 $fill in the blank 13c617f4b05a06d_15 fill in the blank 13c617f4b05a06d_16% Administrative expenses fill in the blank 13c617f4b05a06d_17 fill in the blank 13c617f4b05a06d_18 fill in the blank 13c617f4b05a06d_19 fill in the blank 13c617f4b05a06d_20% Total operating expenses $fill in the blank 13c617f4b05a06d_21 $fill in the blank 13c617f4b05a06d_22 $fill in the blank 13c617f4b05a06d_23 fill in the blank 13c617f4b05a06d_24% Operating income $fill in the blank 13c617f4b05a06d_25 $fill in the blank 13c617f4b05a06d_26 $fill in the blank 13c617f4b05a06d_27 fill in the blank 13c617f4b05a06d_28% Other revenue fill in the blank 13c617f4b05a06d_29 fill in the blank 13c617f4b05a06d_30 fill in the blank 13c617f4b05a06d_31 fill in the blank 13c617f4b05a06d_32 Income before income tax expense $fill in the blank 13c617f4b05a06d_33 $fill in the blank 13c617f4b05a06d_34 $fill in the blank 13c617f4b05a06d_35 fill in the blank 13c617f4b05a06d_36% Income tax expense fill in the blank 13c617f4b05a06d_37 fill in the blank 13c617f4b05a06d_38 fill in the blank 13c617f4b05a06d_39 fill in the blank 13c617f4b05a06d_40% Net income $fill in the blank 13c617f4b05a06d_41 $fill in the blank 13c617f4b05a06d_42 $fill in the blank 13c617f4b05a06d_43 fill in the blank 13c617f4b05a06d_44% 2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1). Net income has declined from 20Y1 to 20Y2. Sales have increased ; however, the cost of goods sold has increased , causing the gross profit to increase at a slower pace than sales. In addition, total operating expenses have increased at a faster rate than sales. Increases in costs and expenses that are higher than the increase in sales have caused the net income to decline .
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Horizontal analysis of income statement
(No incorrect answers so far most Experts today are giving me false answers)
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. Round percentages to one decimal place. For those boxes in which you must enter subtracted or negative numbers use a minus sign.
| McDade Company | ||||
| Comparative Income Statement | ||||
| For the Years Ended December 31, 20Y2 and 20Y1 | ||||
| Increase/(Decrease) | ||||
| 20Y2 | 20Y1 | Amount | Percent | |
| Sales | $fill in the blank 13c617f4b05a06d_1 | $fill in the blank 13c617f4b05a06d_2 | $fill in the blank 13c617f4b05a06d_3 | fill in the blank 13c617f4b05a06d_4% |
| Cost of goods sold | fill in the blank 13c617f4b05a06d_5 | fill in the blank 13c617f4b05a06d_6 | fill in the blank 13c617f4b05a06d_7 | fill in the blank 13c617f4b05a06d_8% |
| Gross profit | $fill in the blank 13c617f4b05a06d_9 | $fill in the blank 13c617f4b05a06d_10 | $fill in the blank 13c617f4b05a06d_11 | fill in the blank 13c617f4b05a06d_12% |
| Selling expenses | $fill in the blank 13c617f4b05a06d_13 | $fill in the blank 13c617f4b05a06d_14 | $fill in the blank 13c617f4b05a06d_15 | fill in the blank 13c617f4b05a06d_16% |
| Administrative expenses | fill in the blank 13c617f4b05a06d_17 | fill in the blank 13c617f4b05a06d_18 | fill in the blank 13c617f4b05a06d_19 | fill in the blank 13c617f4b05a06d_20% |
| Total operating expenses | $fill in the blank 13c617f4b05a06d_21 | $fill in the blank 13c617f4b05a06d_22 | $fill in the blank 13c617f4b05a06d_23 | fill in the blank 13c617f4b05a06d_24% |
| Operating income | $fill in the blank 13c617f4b05a06d_25 | $fill in the blank 13c617f4b05a06d_26 | $fill in the blank 13c617f4b05a06d_27 | fill in the blank 13c617f4b05a06d_28% |
| Other revenue | fill in the blank 13c617f4b05a06d_29 | fill in the blank 13c617f4b05a06d_30 | fill in the blank 13c617f4b05a06d_31 | fill in the blank 13c617f4b05a06d_32 |
| Income before income tax expense | $fill in the blank 13c617f4b05a06d_33 | $fill in the blank 13c617f4b05a06d_34 | $fill in the blank 13c617f4b05a06d_35 | fill in the blank 13c617f4b05a06d_36% |
| Income tax expense | fill in the blank 13c617f4b05a06d_37 | fill in the blank 13c617f4b05a06d_38 | fill in the blank 13c617f4b05a06d_39 | fill in the blank 13c617f4b05a06d_40% |
| Net income | $fill in the blank 13c617f4b05a06d_41 | $fill in the blank 13c617f4b05a06d_42 | $fill in the blank 13c617f4b05a06d_43 | fill in the blank 13c617f4b05a06d_44% |
2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).
Net income has declined from 20Y1 to 20Y2. Sales have increased ; however, the cost of goods sold has increased , causing the gross profit to increase at a slower pace than sales. In addition, total operating expenses have increased at a faster rate than sales. Increases in costs and expenses that are higher than the increase in sales have caused the net income to decline .
Horizontal analysis is prepared to calculate the variance from previous year by showing increase/decrease in each line item for example Revenue growth will be calculated in the horizontal analysis.
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