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 $450,000 $387,000
Cost of goods sold 270,000 212,850
Selling expenses 72,000 69,660
Administrative expenses 76,500 61,920
Income tax expense 13,500 15,480

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 $450,000 % $387,000 %
Cost of goods sold 270,000 % 212,850 %
$ % $ %
Selling expenses 72,000 % 69,660 %
Administrative expenses 76,500 % 61,920 %
$ % $ %
% %
Income tax expense 13,500 % 15,480 %
$ % $ %

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 3 percentage points.

Answer 1

	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	450000	100.0%	387000	100.0%
Cost of goods sold	270000	60.0%	212850	55.0%
Gross Profit	180000	40.0%	174150	45.0%
Selling expenses	72000	16.0%	69660	18.0%
Administrative expense	76500	17.0%	61920	16.0%
Total Operating expenses	148500	33.0%	131580	34.0%
Income from operations	31500	7.0%	42570	11.0%
Income tax expense	13500	3.0%	15480	4.0%
Net income	18000	4.0%	27090	7.0%
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 3 percentage points.