Question

Vertical Analysis of Income Statement

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

	Current Year		Previous Year
Sales	$454,000		$409,000
Cost of goods sold	267,860		216,770
Selling expenses	72,640		77,710
Administrative expenses	81,720		69,530
Income tax expense	13,620		16,360

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	$454,000	%	$409,000	%
Cost of goods sold	267,860	%	216,770	%
	$	%	$	%
Selling expenses	72,640	%	77,710	%
Administrative expenses	81,720	%	69,530	%
	$	%	$	%
		%		%
Income tax expense	13,620	%	16,360	%
	$	%	$	%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales   by 6 percentage points, while selling expenses   by 3 percentage points, and administrative expenses   by 1 percentage points. Thus, net income as a percent of sales   by 3 percentage points.

Answer 1

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	454000	100.0%	409000	100.0%
Cost of goods sold	267860	59.0%	216770	53.0%
Gross profit	186140	41.0%	192230	47.0%
Selling expenses	72640	16.0%	77710	19.0%
Administrative expenses	81720	18.0%	69530	17.0%
Total operating expenses	154360	34.0%	147240	36.0%
Income from operations	31780	7.0%	44990	11.0%
Income tax expense	13620	3.0%	16360	4.0%
Net income	18160	4.0%	28630	7.0%
b
The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 6 percentage points, while selling expenses decreased by 3 percentage points, and administrative expenses increased by 1 percentage points Thus, net income as a percent of sales decreased by 3 percentage points.