The income statement for Sweetwater Ltd. is shown below: SWEETWATER LTD. Income Statement Year Ended December...

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%

Expert Solution

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%

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