Question

17-3 17-01

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	$559,000		$503,000
Cost of goods sold	301,860		246,470
Selling expenses	100,620		100,600
Administrative expenses	111,800		95,570
Income tax expense	16,770		25,150

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	$559,000	%	$503,000	%
Cost of goods sold	301,860	%	246,470	%
	$	%	$	%
Selling expenses	100,620	%	100,600	%
Administrative expenses	111,800	%	95,570	%
	$	%	$	%
		%		%
Income tax expense	16,770	%	25,150	%
	$	%	$	%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales (INCREASED/DECREASED)

by 5 percentage points, while selling expenses (INCREASED/DECREASED)

by 2 percentage points, and administrative expenses INCREASED/DECREASED

by 1 percentage points. Thus, net income as a percent of sales (INCREASED/DECREASED)

by 2 percentage points. (INCREASED/DECREASED)

Answer 1

Formula = Item for which percentage is calculated/Sales*100
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	559000	100.0%	503000	100.0%
Cost of goods sold	301860	54.0%	246470	49.0%
Gross Profit	257140	46.0%	256530	51.0%
Selling expenses	100620	18.0%	100600	20.0%
Administrative expenses	111800	20.0%	95570	19.0%
Total operating expenses	212420	38.0%	196170	39.0%
Income from Operations	44720	8.0%	60360	12.0%
Income tax expense	16770	3.0%	25150	5.0%
Net income	27950	5.0%	35210	7.0%
b
The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 5 percentage points
While selling expenses decreased by 2 percentage points and administrative expenses increased by 1 percentage points.
Thus, net income as a percent of sales decreased by 2 percentage points.