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 $620,000 $539,000 Cost of goods sold 353,400 274,890 Selling expenses 105,400 107,800 Administrative expenses 117,800 91,630 Income tax expense 18,600 26,950 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 $620,000 % $539,000 % Cost of goods sold 353,400 % 274,890 % Gross profit $ % $ % Selling expenses 105,400 % 107,800 % Administrative expenses 117,800 % 91,630 % Total operating expenses $ % $ % Income from operations % % Income tax expense 18,600 % 26,950 % Net income $ % $ % 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

	Comparative Income Statement
	For the Years Ended December 31
	Current year Amount	Current year Percent	Previous year Amount	Previous year Percent
Sales	620000	100.0%	539000	100.0%
Cost of goods sold	353400	57.0%	274890	51.0%
Gross profit	266600	43.0%	264110	49.0%
Selling expenses	105400	17.0%	107800	20.0%
Administrative expenses	117800	19.0%	91630	17.0%
Total operating expenses	223200	36.0%	199430	37.0%
Income from operations	43400	7.0%	64680	12.0%
Income tax expense	18600	3.0%	26950	5.0%
Net income	24800	4.0%	37730	7.0%
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.