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	$511,000		$439,000
Cost of goods sold	281,050		219,500
Selling expenses	91,980		87,800
Administrative expenses	97,090		79,020
Income tax expense	15,330		21,950

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	$511,000	%	$439,000	%
Cost of goods sold	281,050	%	219,500	%
	$	%	$	%
Selling expenses	91,980	%	87,800	%
Administrative expenses	97,090	%	79,020	%
	$	%	$	%
		%		%
Income tax expense	15,330	%	21,950	%
	$	%	$	%

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.

Answer 1

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	Current Year		Previous Year
	(i)	(i) / $511000	(ii)	(ii) / $439000
Sales	$         5,11,000	100%	$                      4,39,000	100%
Cost of goods sold	$         2,81,050	55%	$                      2,19,500	50%
Gross margin	$         2,29,950	45%	$                      2,19,500	50%
Selling and administrative expenses:
Selling expenses	$             91,980	18%	$                          87,800	20%
Administrative expenses	$             97,090	19%	$                          79,020	18%
Total expenses	$         1,89,070	37%	$                      1,66,820	38%
Net Operating Income	$             40,880	8%	$                          52,680	12%
Interest expense	$             15,330	3%	$                          21,950	5%
Income before Income tax	$             25,550	5%	$                          30,730	7%

The Vertical analysis indicates that the cost of goods sold as a percentage of sales increase by 5 percentage points while selling expenses decrease by 2 percentage points, and administrative expenses increase by 1 percentage points. Thus Net Income as a percentage of sales decrease by 2 percentage points