For 20Y3, Greyhound Technology Company reported its most significant decline in

Question

For 20Y3, Greyhound Technology Company reported its most significant decline in net income in years. At the end of the year, Duane Vogel, the president, is presented with the following condensed comparative income statement:

1. Prepare a comparative income statement with horizontal analysis for the two-year period, using 20Y2 as the base year. Round to one decimal place. 2. To the extent the data permit, comment on the significant relationships revealed by the horizontal analysis prepared in (1).

20Y3 20Y2 Increase (Decrease) Amount Amount Amount Percent Sales $880,000 $800,000 $80,000 10.0% Sales returns and allowances 18,000 15,000 3,000 20.0% Net 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    Selling expenses $44,000 $40,000    Administrative expenses 27,000 25,000    Total operating expenses $71,000 $65,000    Income from operations $141,000 $220,000    Other income 2,300 2,000    Income before income tax $143,300 $222,000    Income tax expense 13,000 20,000    Net income $130,300 $202,000   

Explanation / Answer

Base Year 20Y2

Grey Hound Technology company Horizontal Analysis

Base Year 20Y2

20Y3 20Y2 Increase(Decrease) over 20Y2 Amount Amount Amount % Sales           880,000          800,000            80,000 10.00% Sales returns and allowances             18,000            15,000              3,000 20.00% Net sales           862,000          785,000            77,000 9.81% Cost of goods sold           650,000          500,000          150,000 30.00% Gross profit           212,000          285,000          (73,000) -25.61% Selling expenses             44,000            40,000              4,000 10.00% Administrative expenses             27,000            25,000              2,000 8.00% Total operating expenses             71,000            65,000              6,000 9.23% Income from operations           141,000          220,000          (79,000) -35.91% Other income               2,300              2,000                  300 15.00% Income before income tax           143,300          222,000          (78,700) -35.45% Income tax expense             13,000            20,000            (7,000) -35.00% Net income           130,300          202,000          (71,700) -35.50% Significan Relatonships; The net income is 20Y3 has decreased by 35.5% over 20Y2 despite a revenue growth of 10% over 20Y2 mainly due to the following factors; 1. Increase in COGS by 30% in 20Y3 over 20Y2 2. Increase in sales return by 20% in 20Y3 over 20Y2 3. Increase of opearting expenses by 9.23% over 20Y2

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