Question

Express the following comparative income statements in common-size percents and assess whether or not this company’s situation has improved in the most recent year (round the percents to one decimal)

GOMEZ CORPORATION Comparative Income Statements For Years Ended December 31, 2017 and 2016
	2017	2016
Sales	\(740,000	\)625,000
Cost of goods sold	560,300	290,800
Gross profit	179,700	334,200
Operating expenses	128,200	218,500
Net income	\( 51,500	\)115,700

Short answer

The company's performance declinedbetween 2016 and 2017, with net income as a proportion of sales falling from 18.5% to 7%.

Step-by-step solution

Meaning of Income Statement

An income statement is one of the statements that companies are expected to make. By subtracting costs from revenue, an income statement calculates the total amount of income.

Expressing income statements in common-size percent

GOMEZ CORPORATION Comparative Income Statements For Years Ended December 31, 2017, and 2016
	2017	%	2016	%
Sales	$740,000	100	$625,000	100
Cost of goods sold	560,300	75.7	290,800	46.5
Gross profit	179,700	24.3	334,200	53.5
Operating expenses	128,200	17.3	218,500	35
Net income	$ 51,500	7	$115,700	18.5

Analysis:

The company's performance declined with a decline in net income percentage from 18.5% to 7% of sales revenue between 2016 and 2017. The main reason for this was a sharp rise in the cost of goods sold in 2017, which led to a fall in the gross profit margin. The decline in the operating expense ratio for 2017 has been canceled out by the rise in the cost of goods sold in 2017.