Question

1.

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	$517,000		$460,000
Cost of goods sold	284,350		230,000
Selling expenses	93,060		92,000
Administrative expenses	98,230		82,800
Income tax expense	15,510		23,000

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	$517,000	%	$460,000	%
Cost of goods sold	284,350	%	230,000	%
________	$	%	$	%
Selling expenses	93,060	%	92,000	%
Administrative expenses	98,230	%	82,800	%
___________	$	%	$	%
___________		%		%
Income tax expense	15,510	%	23,000	%
___________	$	%	$	%

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.

2.

Vertical Analysis of Balance Sheet

Balance sheet data for Alvarez Company on December 31, the end of two recent fiscal years, follows:

	Current Year		Previous Year
Current assets	$295,500		$169,970
Property, plant, and equipment	591,000		546,860
Intangible assets	98,500		22,170
Current liabilities	187,150		110,850
Long-term liabilities	413,700		302,990
Common stock	108,350		110,850
Retained earnings	275,800		214,310

Prepare a comparative balance sheet for both years, stating each asset as a percent of total assets and each liability and stockholders' equity item as a percent of the total liabilities and stockholders' equity. If required, round percentages to one decimal place.

Alvaraz Company
Comparative Balance Sheet
For the Years Ended December 31
	Current year Amount	Current year Percent	Previous year Amount	Previous year Percent
Current assets	$295,500	__%	$169,970	__%
Property, plant, and equipment	591,000	__%	546,860	__%
Intangible assets	98,500	__%	22,170	__%
Total assets	$985,000	__%	$739,000	__%
Current liabilities	$187,150	__%	$110,850	__%
Long-term liabilities	413,700	__%	302,990	__%
Common stock	108,350	__%	110,850	__%
Retained earnings	275,800	__%	214,310	__%
Total liabilities and stockholders' equity	$985,000	__%	$739,000	__%

2.

Horizontal Analysis of the Income Statement

Income statement data for Winthrop Company for two recent years ended December 31, are as follows:

	Current Year			Previous Year
Sales	$702,000			$540,000
Cost of goods sold	588,800			460,000
Gross profit	$113,200			$80,000
Selling expenses	$33,600			$28,000
Administrative expenses	30,720			24,000
Total operating expenses	$64,320			$52,000
Income before income tax	$48,880			$28,000
Income tax expenses	19,600			11,200
Net income	$29,280			$16,800

a. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. If required, round to one decimal place.

Winthrop Company
Comparative Income Statement
For the Years Ended December 31
	Current year Amount	Previous year Amount	Increase (Decrease) Amount	Increase (Decrease) Percent
Sales	$702,000	$540,000	$	%
Cost of goods sold	588,800	460,000		%
Gross profit	$113,200	$80,000	$	%
Selling expenses	$33,600	$28,000	$	%
Administrative expenses	30,720	24,000		%
Total operating expenses	$64,320	$52,000	$	%
Income before income tax	$48,880	$28,000	$	%
Income tax expense	19,600	11,200		%
Net income	$29,280	$16,800	$	%

b. The net income for Winthrop Company increased between years. This increase was the combined result of an ______ in sales and _____ percentage _____ in cost of goods sold. The cost of goods sold increased at a ______ rate than the increase in sales, thus causing the percentage increase in gross profit to be ______ than the percentage increase in sales.

Answer 1