Question

Vertical Analysis of Income Statement

For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $16,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement:

Tri-Comic Company Comparative Income Statement For the Years Ended December 31, 20Y2 and 20Y1
	20Y2		20Y1
Sales	$575,000		$495,000
Cost of goods sold	281,750		267,300
Gross profit	$293,250		$227,700
Selling expenses	$109,250		$89,100
Administrative expenses	57,500		59,400
Total operating expenses	$166,750		$148,500
Income from operations	$126,500		$79,200
Other revenue	17,250		19,800
Income before income tax	$143,750		$99,000
Income tax expense	57,500		39,600
Net income	$86,250		$59,400

Required:

1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. Enter percentages as whole numbers. Enter all amounts as positive numbers.

Tri-Comic Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2 Amount	20Y2 Percent	20Y1 Amount	20Y1 Percent
Sales	$575,000	%	$495,000	%
Cost of goods sold	281,750	%	267,300	%
Gross profit	$293,250	%	$227,700	%
Selling expenses	$109,250	%	$89,100	%
Administrative expenses	57,500	%	59,400	%
Total operating expenses	$166,750	%	$148,500	%
Income from operations	$126,500	%	$79,200	%
Other revenue	17,250	%	19,800	%
Income before income tax	$143,750	%	$99,000	%
Income tax expense	57,500	%	39,600	%
Net income	$86,250	%	$59,400	%

2. The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses)   as a percentage of sales. As a result, net income as a percentage of sales  . The sales promotion campaign appears to have been  . While selling expenses as a percent of sales   slightly, the   cost was more than made up for by   sales.

Answer 1

• Requirement 1

Tri-Comic Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2 Amount	20Y2 Percent	20Y1 Amount	20Y1 Percent
Sales	$575,000	100%	$495,000	100%
Cost of goods sold	$281,750	49%	$267,300	54%
Gross profit	$293,250	51%	$227,700	46%
Selling expenses	$109,250	19%	$89,100	18%
Administrative expenses	$57,500	10%	$59,400	12%
Total operating expenses	$166,750	29%	$148,500	30%
Income from operations	$126,500	22%	$79,200	16%
Other revenue	$17,250	3%	$19,800	4%
Income before income tax	$143,750	25%	$99,000	20%
Income tax expense	$57,500	10%	$39,600	8%
Net income	$86,250	15%	$59,400	12%

• Requirement 2

The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) has DECREASED as a percentage of sales. As a result, net income as a percentage of sales has INCREASED . The sales promotion campaign appears to have been INCREASED . While selling expenses as a percent of sales has INCREASED  slightly, the INCREASED cost was more than made up for by  INCREASED sales.