The following is a summary of information presented on the financial statements of a company on 31 December 2017.
$$\begin{array} { | l | l | l | }
\hline \text { Account } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 6 } \
\hline \text { Sales revenue } & \$ 603,000 & \$ 500,000 \
\hline \text { Cost of sales } & 454,000 & 401,000 \
\hline \text { Gross profit } & \$ 149,000 & \$ 99,000 \
\hline \text { Selling expenses } & \$ 5,000 & \$ 4,000 \
\hline \text { Profit before income tax } & \$ 94,000 & \$ 45,000 \
\hline \text { Income tax expense } & 39,000 & 19,000 \
\hline \text { Profit } & \$ 55,000 & \$ 26,000 \
\hline
\end{array}$$
What would a horizontal analysis report show with respect to Profit?
A) a 89.66% increase in Profit
B) a 111.54% increase in Profit
C) a $26,000 increase in Profit
D) both Profit before income tax and Profit are 89.66% of Sales revenue

Question

The following is a summary of information presented on the financial statements of a company on 31 December 2017.
$$\begin{array} { | l | l | l | } 
\hline \text { Account } & \mathbf { 2 0 1 7 } & \mathbf { 2 0 1 6 } \
\hline \text { Sales revenue } & \$ 603,000 & \$ 500,000 \
\hline \text { Cost of sales } & 454,000 & 401,000 \
\hline \text { Gross profit } & \$ 149,000 & \$ 99,000 \
\hline \text { Selling expenses } & \$ 5,000 & \$ 4,000 \
\hline \text { Profit before income tax } & \$ 94,000 & \$ 45,000 \
\hline \text { Income tax expense } & 39,000 & 19,000 \
\hline \text { Profit } & \$ 55,000 & \$ 26,000 \
\hline
\end{array}$$
What would a horizontal analysis report show with respect to Profit?
A) a 89.66% increase in Profit
B) a 111.54% increase in Profit
C) a $26,000 increase in Profit
D) both Profit before income tax and Profit are 89.66% of Sales revenue

Quizplus · Accepted Answer

A horizontal analysis compares financial information for different periods, typically using the previous period as the base year. Since no previous period is given in the question, we cannot calculate the exact percentage increase in Profit. However, we can see that Profit has increased from $23,355 in the previous year's financial statements to $49,414 in the current year's financial statements. This represents a dollar increase of $26,059, or an increase of 111.54%. Therefore, the best answer is B. Choice D is incorrect because it suggests that both Profit before income tax and Profit have increased by the same percentage as Sales revenue, which is not necessarily true.

The Following Is a Summary of Information Presented on the Financial