Question

Vertical Analysis of Income Statement

Revenue and expense data for Innovation Quarter Inc. for two recent years are as follows:

	Current Year		Previous Year
Sales	$500,000		$440,000
Cost of goods sold	340,000		277,200
Selling expenses	65,000		66,000
Administrative expenses	70,000		57,200
Income tax expense	10,000		17,600

a. Prepare an income statement in comparative form, stating each item for both years as a percent of sales. If required, round percentages to one decimal place. Enter all amounts as positive numbers.

Innovation Quarter Inc.
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Current year Percent	Previous year Amount	Previous year Percent
Sales	$500,000	%	$440,000	%
Cost of goods sold	340,000	%	277,200	%
	$	%	$	%
Selling expenses	65,000	%	66,000	%
Administrative expenses	70,000	%	57,200	%
	$	%	$	%
		%		%
Income tax expense	10,000	%	17,600	%
	$	%	$	%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales   by 5 percentage points, while selling expenses   by 2 percentage points, and administrative expenses   by 1 percentage points. Thus, net income as a percent of sales   by 2 percentage points.

Answer 1

• Requirement [a]

Innovation Quarter Inc.
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Current year Percent	Previous year Amount	Previous year Percent
Sales	$500,000	100.0%	$440,000	100.0%
Cost of goods sold	$340,000	68.0%	$277,200	63.0%
Gross Profits	$160,000	32.0%	$162,800	37.0%
Selling expenses	$65,000	13.0%	$66,000	15.0%
Administrative expenses	$70,000	14.0%	$57,200	13.0%
Total Operating expense	$135,000	27.0%	$123,200	28.0%
Operating income or Income from Operations	$25,000	5.0%	$39,600	9.0%
Income tax expense	$10,000	2.0%	$17,600	4.0%
Net Income	$15,000	3.0%	$22,000	5.0%

• Requirement [b]

The vertical analysis indicates that the cost of goods sold as a percent of sales  INCREASED by 5 percentage points, while selling expenses  DECREASED by 2 percentage points, and administrative expenses INCREASED  by 1 percentage points. Thus, net income as a percent of sales  DECREASED by 2 percentage points.