Question

Vertical Analysis of Income Statement

For 20Y2, Tri-Comic Company initiated a sales promotion campaign that included the expenditure of an additional $21,000 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	$750,000		$645,000
Cost of goods sold	397,500		380,550
Gross profit	$352,500		$264,450
Selling expenses	$142,500		$116,100
Administrative expenses	75,000		77,400
Total operating expenses	$217,500		$193,500
Income from operations	$135,000		$70,950
Other income	22,500		19,350
Income before income tax	$157,500		$90,300
Income tax expense	60,000		38,700
Net income	$97,500		$51,600

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	$750,000	%	$645,000	%
Cost of goods sold	397,500	%	380,550	%
Gross profit	$352,500	%	$264,450	%
Selling expenses	142,500	%	116,100	%
Administrative expenses	75,000	%	77,400	%
Total operating expenses	$217,500	%	$193,500	%
Income from operations	$135,000	%	$70,950	%
Other income	22,500	%	19,350	%
Income before income tax	$157,500	%	$90,300	%
Income tax expense	60,000	%	38,700	%
Net income	$97,500	%	$51,600	%

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

Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
	20Y2 Amount	20Y2 Percent	20Y1 Amount	20Y1 Percent
Sales	750000	100.0%	645000	100.0%
Cost of goods sold	397500	53.0%	380550	59.0%
Gross profit	352500	47.0%	264450	41.0%
Selling expenses	142500	19.0%	116100	18.0%
Administrative expenses	75000	10.0%	77400	12.0%
Total operating expenses	217500	29.0%	193500	30.0%
Income from operations	135000	18.0%	70950	11.0%
Other income	22500	3.0%	19350	3.0%
Income before income tax	157500	21.0%	90300	14.0%
Income tax expense	60000	8.0%	38700	6.0%
Net income	97500	13.0%	51600	8.0%
2
The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) improved as a percentage of sales. As a result, net income as a percentage of sales increased 5 percent (from 8% to 13%) .The sales promotion campaign appears to have been successful.. While selling expenses as a percent of sales increased slightly (1%), the increased cost was more than made up for by increased sales.