Question

Vertical Analysis of Income Statement

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

	Current year Amount	Previous year Amount
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.

b. The vertical analysis indicates that the cost of goods sold as a percent of sales ___ by __ percentage points, while selling expenses___by ___percentage points, and administrative expenses_____by ___percentage points. Thus, net income as a percent of sales___by __percentage points.

Answer 1

>Under Vertical analysis of financial statements:

--For INCOME STATEMENT, Sales for the that period are taken as the denominator value for calculating each percentage value of that period.

--For BALANC SHEET, Total Assets for the that period are taken as the denominator value for calculating each percentage value of that period.

 

Requirement [a] Calculations

 

	Current year Amount	Current year Percent
Sales	$450,000	($ 450000 / $ 450000 sales) x 100	100.0%
Cost of goods sold	$270,000	($ 270000 / $ 450000 sales) x 100	60.0%
Gross profit	$180,000	($ 180000 / $ 450000 sales) x 100	40.0%
Selling expenses	$72,000	($ 72000 / $ 450000 sales) x 100	16.0%
Administrative expenses	$76,500	($ 76500 / $ 450000 sales) x 100	17.0%
Total operating expenses	$148,500	($ 148500 / $ 450000 sales) x 100	33.0%
Income from operations	$31,500	($ 31500 / $ 450000 sales) x 100	7.0%
Income tax expense	$13,500	($ 13500 / $ 450000 sales) x 100	3.0%
Net income	$18,000	($ 18000 / $ 450000 sales) x 100	4.0%

 

	Previous year Amount	Previous year Percent
Sales	$387,000	($ 387000 / $ 387000 sales) x 100	100.0%
Cost of goods sold	$212,850	($ 212850 / $ 387000 sales) x 100	55.0%
Gross profit	$174,150	($ 174150 / $ 387000 sales) x 100	45.0%
Selling expenses	$69,660	($ 69660 / $ 387000 sales) x 100	18.0%
Administrative expenses	$61,920	($ 61920 / $ 387000 sales) x 100	16.0%
Total operating expenses	$131,580	($ 131580 / $ 387000 sales) x 100	34.0%
Income from operations	$42,570	($ 42570 / $ 387000 sales) x 100	11.0%
Income tax expense	$15,480	($ 15480 / $ 387000 sales) x 100	4.0%
Net income	$27,090	($ 27090 / $ 387000 sales) x 100	7.0%

 

[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	$450,000	100.0%	$387,000	100.0%
Cost of goods sold	$270,000	60.0%	$212,850	55.0%
Gross profit	$180,000	40.0%	$174,150	45.0%
Selling expenses	$72,000	16.0%	$69,660	18.0%
Administrative expenses	$76,500	17.0%	$61,920	16.0%
Total operating expenses	$148,500	33.0%	$131,580	34.0%
Income from operations	$31,500	7.0%	$42,570	11.0%
Income tax expense	$13,500	3.0%	$15,480	4.0%
Net income	$18,000	4.0%	$27,090	7.0%

Requirement [b] 

The vertical analysis indicates that the cost of goods sold as a percent of sales	INCREASED	by	5.0%	points,
while selling expenses	DECREASED	by	-2.0%	points,
administrative expenses	INCREASED	by	1.0%	points,
Thus, net income as a percent of sales	DECREAED	by	-3.0%	points.