Question

The income statement for Sweetwater Ltd. is shown below:

SWEETWATER LTD. Income Statement Year Ended December 31 (in millions)
		2018		2017		2016
Sales		$ 1,603		$ 1,403		$ 1,205
Cost of goods sold		907		754		602
Gross profit		696		649		603
Operating expenses		516		407		401
Income from operations		180		242		202
Interest expense		80		50		40
Income before income tax		100		192		162
Income tax expense		25		48		41
Net income		$ 75		$ 144		$ 121

Part 1

Using horizontal analysis, calculate the horizontal percentage of a base-year amount, assuming 2016 is the base year. (Round answers to 1 decimal place, e.g. 5.2%.)

SWEETWATER LTD. Horizontal Analysis of Income Statement (% of base-year amount) Year Ended December 31
		2018			2017			2016
Sales		enter percentages	%		enter percentages	%		enter percentages	%
Cost of goods sold		enter percentages	%		enter percentages	%		enter percentages	%
Gross profit		enter percentages	%		enter percentages	%		enter percentages	%
Operating expenses		enter percentages	%		enter percentages	%		enter percentages	%
Income from operations		enter percentages	%		enter percentages	%		enter percentages	%
Interest expense		enter percentages	%		enter percentages	%		enter percentages	%
Income before income tax		enter percentages	%		enter percentages	%		enter percentages	%
Income tax expense		enter percentages	%		enter percentages	%		enter percentages	%
Net income		enter percentages	%		enter percentages	%		enter percentages	%

Part 2

Using vertical analysis, calculate the percentage of the base amount for each year. (Round answers to 1 decimal place, e.g. 5.2%. Enter negative amounts using either a negative sign preceding the number e.g. -45.1% or parentheses e.g. (45.1)%.)

SWEETWATER LTD. Vertical Analysis of Income Statement
		2018				2017				2016
		Amount		Percent		Amount		Percent		Amount		Percent
Sales		$ 1,603		enter percentages%		$ 1,403		enter percentages%		$ 1,205		enter percentages%
Cost of goods sold		907		enter percentages%		754		enter percentages%		602		enter percentages%
Gross profit		696		enter percentages%		649		enter percentages%		603		enter percentages%
Operating expenses		516		enter percentages%		407		enter percentages%		401		enter percentages%
Income from operations		180		enter percentages%		242		enter percentages%		202		enter percentages%
Interest expense		80		enter percentages%		50		enter percentages%		40		enter percentages%
Income before income tax		100		enter percentages%		192		enter percentages%		162		enter percentages%
Income tax expense		25		enter percentages%		48		enter percentages%		41		enter percentages%
Net income		$ 75		enter percentages%		$ 144		enter percentages%		$ 121		enter percentages%

Answer 1

• Requirement 1: Horizontal Analysis

	2018		2017		2016
	Amount	Working	Amount	Working	Amount	Working
Sales	133.0%	[ 1603 / 1205 ]	116.4%	[ 1403 / 1205 ]	100.0%	[ 1205 / 1205 ]
Cost of goods sold	150.7%	[ 907 / 602 ]	125.2%	[ 754 / 602 ]	100.0%	[ 602 / 602 ]
Gross profit	115.4%	[ 696 / 603 ]	107.6%	[ 649 / 603 ]	100.0%	[ 603 / 603 ]
Operating expenses	128.7%	[ 516 / 401 ]	101.5%	[ 407 / 401 ]	100.0%	[ 401 / 401 ]
Income from operations	89.1%	[ 180 / 202 ]	119.8%	[ 242 / 202 ]	100.0%	[ 202 / 202 ]
Interest expense	200.0%	[ 80 / 40 ]	125.0%	[ 50 / 40 ]	100.0%	[ 40 / 40 ]
Income before income tax	61.7%	[ 100 / 162 ]	118.5%	[ 192 / 162 ]	100.0%	[ 162 / 162 ]
Income tax expense	61.0%	[ 25 / 41 ]	117.1%	[ 48 / 41 ]	100.0%	[ 41 / 41 ]
Net income	62.0%	[ 75 / 121 ]	119.0%	[ 144 / 121 ]	100.0%	[ 121 / 121 ]

• Requirement 2: Vertical Analysis

SWEETWATER LTD.
Vertical Analysis of Income Statement
	2018		2017		2016
	Amount	Percent	Amount	Percent	Amount	Percent
Sales	$                 1,603	100.0%	$             1,403	100.0%	$                   1,205	100.0%
Cost of goods sold	$                     907	56.6%	$                754	53.7%	$                       602	50.0%
Gross profit	$                    696	43.4%	$                649	46.3%	$                       603	50.0%
Operating expenses	$                     516	32.2%	$                407	29.0%	$                       401	33.3%
Income from operations	$                     180	11.2%	$                242	17.2%	$                       202	16.8%
Interest expense	$                       80	5.0%	$                   50	3.6%	$                         40	3.3%
Income before income tax	$                     100	6.2%	$                192	13.7%	$                       162	13.4%
Income tax expense	$                       25	1.6%	$                   48	3.4%	$                         41	3.4%
Net income	$                       75	4.7%	$                144	10.3%	$                       121	10.0%