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	$392,000		$353,000
Cost of goods sold	231,280		180,030
Selling expenses	62,720		70,600
Administrative expenses	70,560		60,010
Income tax expense	11,760		17,650

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	$392,000	%	$353,000	%
Cost of goods sold	231,280	%	180,030	%
	$	%	$	%
Selling expenses	62,720	%	70,600	%
Administrative expenses	70,560	%	60,010	%
	$	%	$	%
		%		%
Income tax expense	11,760	%	17,650	%
	$	%	$	%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales   by 8 percentage points, while selling expenses   by 4 percentage points, and administrative expenses   by 1 percentage points. Thus, net income as a percent of sales   by 3 percentage points.

Answer 1

a) Income statement in comparative form, stating each item for both years as a percent of sales is as follows:

   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	392,000	100%	353,000	100%
Cost of goods sold	231,280	59%	180,030	51%
Gross Profit	160,720	41%	172,970	49%
Selling expenses	62,720	16%	70,600	20%
Administrative expenses	70,560	18%	60,010	17%
Total Operating Expenses	133,280	34%	130,610	37%
Net Income before tax	27,440	7%	42,360	12%
Income Tax Expenses	11,760	3%	17,650	5%
Net Income	$15,680	4%	$24,710	7%

b)The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 8 percentage points, while selling expenses Decreased by 4 percentage points, and administrative expenses increased by 1 percentage points. Thus, net income as a percent of sales Decreased by 3 percentage points.