2014 2013
Sales $ 840,000 $600,000
Cost of goods sold 724,500 525,000
Gross profit $ 115,500 $ 75,000
Selling expenses $ 52,500 $ 37,500
Administrative expenses 41,400 30,000
Total operating expenses $ 93,900 $ 67,500
Income before income tax $ 21,600 $ 7,500
Income tax expense 10,800 2,700
Net income $ 10,800 $ 4,800
a. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for 2014 when compared with 2013. Round to one decimal place.
b. What conclusions can be drawn from the horizontal analysis?
Answer:
a.
BEZOS COMPANY
Comparative Income Statement
For the Years Ended December 31, 2014 and 2013
2014 2013 Increase (Decrease)
Amount Amount Amount Percent
Sales $840,000 $600,000 $240,000 40.0%
Cost of goods sold 724,500 525,000 199,500 38.0%
Gross profit $115,500 $ 75,000 $ 40,500 54.0%
Selling expenses 52,500 37,500 15,000 40.0%
Administrative expenses 41,400 30,000 11,400 38.0%
Total operating expenses $ 93,900 $ 67,500 $ 26,400 39.1%
Income before income tax 21,600 7,500 14,100 188.0%
Income tax expense 10,800 2,700 8,100 300.0%
Net income $ 10,800 $ 4,800 $ 6,000 125.0%
b. The net income for Bezos Company increased by approximately 125% from 2013
to 2014. This increase was the combined result of an increase in sales of 40%
and lower percentage increases in cost of goods sold and administrative expenses.
The cost of goods sold increased at a slower rate than the increase in sales, thus
causing the percentage increase in gross profit to exceed the percentage increase
in sales.