Question

Vertical Analysis of Income Statement

For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $12,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement:

Tri-Comic Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2 20Y1
Sales $440,000 $378,000
Cost of goods sold 228,800 215,460
Gross profit $211,200 $162,540
Selling expenses $83,600 $68,040
Administrative expenses 44,000 45,360
Total operating expenses $127,600 $113,400
Income from operations $83,600 $49,140
Other income 17,600 22,680
Income before income tax $101,200 $71,820
Income tax expense 39,600 30,240
Net income $61,600 $41,580

Required:

1. Prepare a comparative income statement for the two-year period, presenting an analysis of each item in relationship to sales for each of the years. Enter percentages as whole numbers. Enter all amounts as positive numbers.

Tri-Comic Company
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2 Amount 20Y2 Percent 20Y1 Amount 20Y1 Percent
Sales $440,000 % $378,000 %
Cost of goods sold 228,800 % 215,460 %
Gross profit $211,200 % $162,540 %
Selling expenses 83,600 % 68,040 %
Administrative expenses 44,000 % 45,360 %
Total operating expenses $127,600 % $113,400 %
Income from operations $83,600 % $49,140 %
Other income 17,600 % 22,680 %
Income before income tax $101,200 % $71,820 %
Income tax expense 39,600 % 30,240 %
Net income $61,600 % $41,580 %

2. The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses)   as a percentage of sales. As a result, net income as a percentage of sales  . The sales promotion campaign appears to have been  . While selling expenses as a percent of sales   slightly, the   cost was more than made up for by   sales.

Answer 1

	Amount 20Y2	Percent	Amount 20Y1	Percent
Sales	440000	100%	378000	100%
Cost of goods sold	228800	52%	215460	57%
Gross profit	211200	48%	162540	43%
Selling expenses	83600	19%	68040	18%
Administrative expenses	44000	10%	45360	12%
Total operating expenses	127600	29%	113400	30%
Income from operations	83600	19%	49140	13%
Other income	17600	4%	22680	6%
Income before income tax	101200	23%	71820	19%
Income tax expense	39600	9%	30240	8%
Net income	61600	14%	41580	11%
2
The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) improved as a percentage of sales
As a result, net income as a percentage of sales increased. The sales promotion campaign appears to have been successful.
While selling expenses as a percent of sales increased slightly, the increased cost was more than made up for by increased sales.