Question

Vertical Analysis of Income Statement

For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $20,000 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	$729,000		$627,000
Cost of goods sold	328,050		313,500
Gross profit	$400,950		$313,500
Selling expenses	$145,800		$119,130
Administrative expenses	72,900		75,240
Total operating expenses	$218,700		$194,370
Income from operations	$182,250		$119,130
Other income	36,450		18,810
Income before income tax	$218,700		$137,940
Income tax expense	87,480		56,430
Net income	$131,220		$81,510

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	$729,000	%	$627,000	%
Cost of goods sold	328,050	%	313,500	%
Gross profit	$400,950	%	$313,500	%
Selling expenses	145,800	%	119,130	%
Administrative expenses	72,900	%	75,240	%
Total operating expenses	$218,700	%	$194,370	%
Income from operations	$182,250	%	$119,130	%
Other income	36,450	%	18,810	%
Income before income tax	$218,700	%	$137,940	%
Income tax expense	87,480	%	56,430	%
Net income	$131,220	%	$81,510	%

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

Solution 1:

Tri - Comic Company
Comparative Income Statement
For the year ended December 31, 20Y2 and 20Y1
Particulars	20Y2		20Y1
	Amount	Percent	Amount	Percent
Sales	$729,000.00	100.0%	$627,000.00	100.0%
Cost of goods sold	$328,050.00	45.0%	$313,500.00	50.0%
Gross Profit	$400,950.00	55.0%	$313,500.00	50.0%
Selling Expenses	$145,800.00	20.0%	$119,130.00	19.0%
Administrative Expenses	$72,900.00	10.0%	$75,240.00	12.0%
Total Operating expenses	$218,700.00	30.0%	$194,370.00	31.0%
Income from operations	$182,250.00	25.0%	$119,130.00	19.0%
Other Income	$36,450.00	5.0%	$18,810.00	3.0%
Income before income tax	$218,700.00	30.0%	$137,940.00	22.0%
Income Tax Expense	$87,480.00	12.0%	$56,430.00	9.0%
Net Income	$131,220.00	18.0%	$81,510.00	13.0%

Solution 2:

The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) as a percentage of sales is lower in 20Y2 as compared to 20Y1. As a result, net income as a percentage of sales is high in 20Y2 as compared to 20Y1 . The sales promotion campaign appears to have been increased in 20Y2. While selling expenses as a percent of sales slightly high in 20Yw, the cost was more than made up for by sales.