Question

Corp. reported the following on its comparative income​ statement:

Answer 1

Answer:

Corp's comparative income​ statement:

Horizontal analysis of revenue and gross profit in dollar and percentage terms:

Income statement             2019                  2018            Base Year 2017

Revenue                      $700    7.6%     $490     5.3%

Cost of Goods Sold  $1,085  17.7%      $775    12.7%

Gross profit                ($385) -12.5%    ($285)  -9.2%

Explanation:

a) Data:

Corp's comparative income​ statement:  

                              (In millions) 2019     2018       2017

Revenue                                $9,910    $9,700    $9,210

Cost of Goods Sold                 7,210      6,900      6,125

Gross profit                           $2,700   $2,800    $3,085

b) The horizontal analyses are performed by calculating the dollar differences between 2019 and 2018 revenue, cost of goods sold, and gross profit and those of the base year, 2017.  The dollar differences are divided by the base year's figures to obtain the percentage changes.  The results show that the gross profit reduced by 12.5% and 9.2% respectively for 2019 and 2018 financial years.  This situation is despite the increases in the revenue both in dollar and percentage terms.  However, the reason for this abysmal performance as measured by the gross profit can be attributed to the increasing cost of goods sold.  This is a pointer to management to discover the root cause(s) in order to reduce the cost overrun.