Question

For 2016, Indigo Company initiated a sales promotion campaign that included the expenditure of an additional $39,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement:

Indigo Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1		2016	2015
2	Sales	$950,000.00	$680,000.00
3	Cost of goods sold	323,000.00	244,800.00
4	Gross profit	$627,000.00	$435,200.00
5	Selling expenses	$180,500.00	$115,600.00
6	Administrative expenses	47,500.00	47,600.00
7	Total operating expenses	$228,000.00	$163,200.00
8	Income from operations	$399,000.00	$272,000.00
9	Other income	76,000.00	54,400.00
10	Income before income tax	$475,000.00	$326,400.00
11	Income tax expense	275,500.00	197,200.00
12	Net income	$199,500.00	$129,200.00

	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. Round your percentages to one decimal place. Enter all amounts as positive numbers.
2.	To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1).

Income Statement

1. Prepare an income statement in comparative form, stating each item for both years as a percent of sales. Round your percentages to one decimal place. Enter all amounts as positive numbers.

Indigo Company

Comparative Income Statement

For the Years Ended December 31, 2016 and 2015

1		2016	2016	2015	2015
2		Amount	Percent	Amount	Percent
3	Sales	$950,000.00		$680,000.00
4	Cost of goods sold	323,000.00		244,800.00
5	Gross profit	$627,000.00		$435,200.00
6	Selling expenses	$180,500.00		$115,600.00
7	Administrative expenses	47,500.00		47,600.00
8	Total operating expenses	$228,000.00		$163,200.00
9	Income from operations	$399,000.00		$272,000.00
10	Other income	76,000.00		54,400.00
11	Income before income tax	$475,000.00		$326,400.00
12	Income tax expense	275,500.00		197,200.00
13	Net income	$199,500.00		$129,200.00

Final Question

2. Comment on the significant relationships revealed by the vertical analysis prepared in (1).

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 by 2 percentage points. 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