Preparing Common-Size Income Statements by Using Base Period Horizontal Analysis
ID: 2485927 • Letter: P
Question
Preparing Common-Size Income Statements by Using Base Period Horizontal Analysis
Allyson Company provided the following income statements for its first three years of operation:
Prepare common-size income statements by using year 1 as the base period. (Note: Round answers to the nearest whole percentage.)
Allyson Company
Income Statements
Years of Operation
Year 1 Dollars
Year 1 Percent
Year 2 Dollars
Year 2 Percent
Year 3 Dollars
Year 3 Percent
Net sales
$1,000,000
Correct 12
$1,100,000
Correct 14
$1,250,000
Correct 16
Less: Cost of goods sold
(700,000)
Correct 19
(750,000)
Correct 21
(810,000)
Correct 23
Gross margin
$ 300,000
Correct 26
$ 350,000
Correct 28
$ 440,000
Correct 30
Less:
Operating expenses
(200,000)
Correct 34
(251,000)
Correct 36
(310,000)
Correct 38
Income taxes
(40,000)
Correct 41
(33,000)
Correct 43
(52,000)
Correct 45
Net income
$ 60,000
Correct 48
$ 66,000
Correct 50
$ 78,000
%
Year 1 Year 2 Year 3 Net sales $1,000,000 $1,100,000 $1,250,000 Less: Cost of goods sold (700,000) (750,000) (810,000) Gross margin $ 300,000 $ 350,000 $ 440,000 Less: Operating expenses (200,000) (251,000) (310,000) Income taxes (40,000) (33,000) (52,000) Net income $ 60,000 $ 66,000 $ 78,000Explanation / Answer
As year 1 is the base year every dollar amount in year 1 will be 100%. Take for instance the line item of net sales. For year 1 the % will be = $1,000,000/$1,000,000 = 100%
For year 2 it will be $1,100,000/$1,000,000 = 110% and for year 2 it will be = $1,250,000/$1,000,000 = 125%
Calculations have been done in a similar fashion for other line items:
Year 1 dollars Year 1 % Year 2 Year 2 % Year 3 Year 3 % Net sales $1,000,000 100.00 $1,100,000 110.00 $1,250,000 125.00 Less: Cost of goods sold -700,000 100.00 -750,000 107.14 -810,000 115.71 Gross margin $300,000 100.00 $350,000 116.67 $440,000 146.67 Less: Operating expenses -200,000 100.00 -251,000 125.50 -310,000 155.00 Income taxes -40,000 100.00 -33,000 82.50 -52,000 130.00 Net income $60,000 100.00 $66,000 110.00 $78,000 130.00