**Exercise 17-4: Computing and Interpreting Common-Size Percents LO P2**This exercise involves expressing comparative income statements in common-size percentages. The goal is to identify which item is most responsible for the decline in net income using these percentages.- **Instructions:** - Examine the given income statement. - Determine the reason for the decline in net income by analyzing the common-size percentages.- **Tools Provided:** - An interactive section labeled "Income Statement" for viewing data. - A section labeled "Reason for Decline in Net Income" to input findings.- **Navigation:** - Use options like "Prev" and "Next" to move between pages (currently on page 5 of 11).The interface shows an emphasis on engaging with the data provided to draw conclusions about changes in net income. **Educational Website Text: Analyzing Comparative Income Statements**### Understanding Comparative Income Statements in Common-Size PercentagesTo evaluate a company's financial performance over time, it's useful to compare income statements in terms of percentages, also known as common-size statements. This allows us to identify trends and changes in the company's financial activity, making it easier to pinpoint areas responsible for any shifts in net income. Let's explore an example from Gomez Corporation.#### Gomez Corporation: Comparative Income StatementsFor Years Ended December 31| Category | Current Year ($) | Current Year (%) | Prior Year ($) | Prior Year (%) ||----------------------|-----------------|----------------|---------------|---------------|| Sales | 740,000 | | 655,000 | || Cost of Goods Sold | 570,800 | | 282,200 | || Gross Profit | 169,200 | | 372,800 | || Operating Expenses | 159,200 | | 258,800 | || Net Income | 40,000 | | 114,000 | |#### Analyzing the Statements- **Sales** increased from $655,000 in the prior year to $740,000 in the current year. Expressed as a percentage of sales, this category represents the total revenue generated by Gomez Corporation. - **Cost of Goods Sold (COGS)** saw a significant rise from $282,200 to $570,800, indicating increased production or procurement costs. This sharp increase is a critical area to inspect for its impact on net income.- **Gross Profit** decreased from $372,800 to $169,200, showing that despite an increase in sales, the profit margin was reduced due to higher COGS.- **Operating Expenses** also reduced from $258,800 to $159,200, which might signify better cost management despite higher COGS.- **Net Income** dropped from $114,000 to $40,000, a significant decline clearly influenced by the increased COGS.#### ConclusionWhen these figures are expressed as common-size percentages, it becomes clear which elements most significantly impact net income trends. In this case, the substantial rise in the cost of goods sold is predominantly responsible for the decline in net income, despite efforts to reduce operating expenses.#### Next StepsTo improve future

Vertical analysis: The comparison of an item of a financial statement against the total amount of…

in net income? Income Statement Reason for Decline in Net Income Using the common-size percentages, which item is most responsible for the decline in net income? < Income Statement Reason for Decline in Net Income www

in net income? Income Statement Reason for Decline in Net Income Using the common-size percentages, which item is most responsible for the decline in net income? < Income Statement Reason for Decline in Net Income www

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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