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In: Accounting

Revenue and expense data for Innovation Quarter Inc. for two recent years are as follows:        Current...

Revenue and expense data for Innovation Quarter Inc. for two recent years are as follows:

       Current Year        Previous Year
Sales $381,000 $328,000
Cost of goods sold 220,980 173,840
Selling expenses 64,770 62,320
Administrative expenses 68,580 55,760
Income tax expense 11,430 13,120

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 $381,000 % $328,000 %
Cost of goods sold 220,980 % 173,840 %
$ % $ %
Selling expenses 64,770 % 62,320 %
Administrative expenses 68,580 % 55,760 %
$ % $ %
% %
Income tax expense 11,430 % 13,120 %
$ % $ %

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 3 percentage points.

Solutions

Expert Solution

a.comparitive income statement:(workings are provided in brackets)

current year amount current year percent previous year amount previous year percent
sales $381,000 (381,000/381,000*100)=>100% $328,000 (328,000/328,000*100)=>100%
cost of goods sold 220,980 (220,980/381,000*100)=>58% 173,840 (173,840/328,000*100)=>53%
gross profit 160,020 (160,020/381,000)*100=>42% 154,160 (154,160/328,000*100)=>47%
selling expenses 64,770 (64,770/381,000)*100=>17% 62,320 (62,320/328,000*100)=>19%
administrative expenses 68,580 (68,580/381,000)*100=>18% 55,760 (55,760/328,000*100)=>17%
income before tax (gross profit - expenses) 26,670 (26,670/381,000)*100=>7% 36,080 (36,080/328,000*100)=>11%
income tax 11,430 (11,430/381,000*100)=>3% 13,120 (13,120/328,000*100)=>4%
net income 15,240 (15,240/381,000*100)=>4% 22,960 (22,960/328,000*100)=>7%

b.The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 5 percentage points, while selling expenses reduced by 2 percentage points, and administrative expenses increased by 1 percentage point. Thus net income as a percent of sales decreased by 3 percentage point.


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