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	$890,000.00	$600,000.00
3	Cost of goods sold	320,400.00	228,000.00
4	Gross profit	$569,600.00	$372,000.00
5	Selling expenses	$142,400.00	$84,000.00
6	Administrative expenses	62,300.00	54,000.00
7	Total operating expenses	$204,700.00	$138,000.00
8	Income from operations	$364,900.00	$234,000.00
9	Other income	80,100.00	54,000.00
10	Income before income tax	$445,000.00	$288,000.00
11	Income tax expense	231,400.00	156,000.00
12	Net income	$213,600.00	$132,000.00

	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	$890,000.00		$600,000.00
4	Cost of goods sold	320,400.00		228,000.00
5	Gross profit	$569,600.00		$372,000.00
6	Selling expenses	$142,400.00		$84,000.00
7	Administrative expenses	62,300.00		54,000.00
8	Total operating expenses	$204,700.00		$138,000.00
9	Income from operations	$364,900.00		$234,000.00
10	Other income	80,100.00		54,000.00
11	Income before income tax	$445,000.00		$288,000.00
12	Income tax expense	231,400.00		156,000.00
13	Net income	$213,600.00		$132,000.00

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

1. Prepare an income statement in comparative form, stating each item of both years as a percent of sales        .

INDIGO COMPANY
Comparative income statement
For the year ended December 31 2016 and 2017
	2016	2016	2015	2015
Sales	890000	100%	600000	100%
cost of goods sold	320400	36%	228000	38%
Gross profit	569600	64%	372000	62%
Selling expense	142400	16%	84000	14%
Administrative expenses	62300	7%	54000	9%
Total operating expenses	204700	23%	138000	23%
Income from operations	364900	41%	234000	39%
Other income	80100	9%	54000	9%
Income before income tax	445000	50%	288000	48%
Income tax expense	231400	26%	156000	26%
Net income	213600	24%	132000	22%

2.Comment on the significant relationship revealed by vertical analysis.

The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) Improved as percentage to the sales. As a result net income as percentage of sales increased by2 percentage points. While selling expenses increases slightly, the increased cost was more than made up for by increased sales