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	$479,000		$402,000
Cost of goods sold	273,030		205,020
Selling expenses	81,430		80,400
Administrative expenses	91,010		68,340
Income tax expense	14,370		20,100

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	$479,000	%	$402,000	%
Cost of goods sold	273,030	%	205,020	%
	$	%	$	%
Selling expenses	81,430	%	80,400	%
Administrative expenses	91,010	%	68,340	%
	$	%	$	%
		%		%
Income tax expense	14,370	%	20,100	%
	$	%	$	%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales   by 6 percentage points, while selling expenses  by 3 percentage points, and administrative expenses   by 2 percentage points. Thus, net income as a percent of sales   by 3 percentage points.

Answer 1

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	479000	100.0%	402000	100.0%
Cost of goods sold	273030	57.0%	205020	51.0%
Gross profit	205970	43.0%	196980	49.0%
Selling expenses	81430	17.0%	80400	20.0%
Administrative expenses	91010	19.0%	68340	17.0%
Total operating expenses	172440	36.0%	148740	37.0%
Income before income tax	33530	7.0%	48240	12.0%
Income tax expense	14370	3.0%	20100	5.0%
Net income	19160	4.0%	28140	7.0%
b
The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 6 percentage points, while selling expenses decreased by 3 percentage points, and administrative expenses increased by 2 percentage points. Thus, net income as a percent of sales decreased by 3 percentage points.