Chapter 9, Problem 9.5E

To determine

Concept Introduction:

Horizontal Analysis:

Horizontal Analysis is used to analyze the trend of an item. Horizontal Analysis is done in different periods for example analysis of trend of sales for several years is done using the horizontal analysis.

Requirement-a:

To Prepare:

The Comparative Income Statement using horizontal analysis.

Answer to Problem 9.5E

The Comparative Income Statement using horizontal analysis

Horizontal Analysis of Comparative Income Statement
Year	Percentage
Sales	9.8%
Cost of Goods Sold	30.0%
Gross Profit	-25.6%
Selling expenses	10.0%
Administrative expenses	8.0%
Total Operating expenses	9.2%
Income from operations	-35.9%
Other Revenue	15.0%
Income before income tax	-35.5%
Income Tax Expense	-35.0%
Net Income	-35.5%

Explanation of Solution

The Comparative Income Statement using horizontal analysis is prepared as follows:

Horizontal Analysis of Comparative Income Statement
			Increase (Decrease)
Year	20Y5	20Y4	Amount	Percentage
	A	B	C = (A-B)	C/B
Sales	$ 862,000	$ 785,000	$ 77,000	9.8%
Cost of Goods Sold	$ 650,000	$ 500,000	$ 150,000	30.0%
Gross Profit	$ 212,000	$ 285,000	$ (73,000)	-25.6%
Selling expenses	$ 44,000	$ 40,000	$ 4,000	10.0%
Administrative expenses	$ 27,000	$ 25,000	$ 2,000	8.0%
Total Operating expenses	$ 71,000	$ 65,000	$ 6,000	9.2%
Income from operations	$ 141,000	$ 220,000	$ (79,000)	-35.9%
Other Revenue	$ 2,300	$ 2,000	$ 300	15.0%
Income before income tax	$ 143,300	$ 222,000	$ (78,700)	-35.5%
Income Tax Expense	$ 13,000	$ 20,000	$ (7,000)	-35.0%
Net Income	$ 130,300	$ 202,000	$ (71,700)	-35.5%

To determine

Concept Introduction:

Horizontal Analysis:

Horizontal Analysis is used to analyze the trend of a particular item. Horizontal Analysis is done for items for different periods for example sale trends for several years are found using horizontal analysis.

Requirement-a:

To Indicate:

The results from horizontal analysis.

Answer to Problem 9.5E

The significant results from horizontal analysis are as follows:

• Cost of goods sold has increased more as compared with sales, which has resulted in decrease in gross profit.
• Income from operation has decreased mainly due to decrease in gross profit.

Explanation of Solution

The Comparative Income Statement using horizontal analysis is prepared as follows:

Horizontal Analysis of Comparative Income Statement
			Increase (Decrease)
Year	20Y5	20Y4	Amount	Percentage
	A	B	C = (A-B)	C/B
Sales	$ 862,000	$ 785,000	$ 77,000	9.8%
Cost of Goods Sold	$ 650,000	$ 500,000	$ 150,000	30.0%
Gross Profit	$ 212,000	$ 285,000	$ (73,000)	-25.6%
Selling expenses	$ 44,000	$ 40,000	$ 4,000	10.0%
Administrative expenses	$ 27,000	$ 25,000	$ 2,000	8.0%
Total Operating expenses	$ 71,000	$ 65,000	$ 6,000	9.2%
Income from operations	$ 141,000	$ 220,000	$ (79,000)	-35.9%
Other Revenue	$ 2,300	$ 2,000	$ 300	15.0%
Income before income tax	$ 143,300	$ 222,000	$ (78,700)	-35.5%
Income Tax Expense	$ 13,000	$ 20,000	$ (7,000)	-35.0%
Net Income	$ 130,300	$ 202,000	$ (71,700)	-35.5%

The significant findings from the horizontal analysis are as follows:

• Cost of goods sold has increased more as compared to sales, which has resulted in decrease in gross profit.
• Income from operation has decreased mainly due to decrease in gross profit.