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Vertical Analysis of Income Statement Revenue and expense data for Innovation Quarter Inc. for two recent...

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 $567,000 $493,000
Cost of goods sold 385,560 310,590
Selling expenses 73,710 73,950
Administrative expenses 79,380 64,090
Income tax expense 11,340 19,720

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 $567,000 % $493,000 %
Cost of goods sold 385,560 % 310,590 %
$ % $ %
Selling expenses 73,710 % 73,950 %
Administrative expenses 79,380 % 64,090 %
$ % $ %
% %
Income tax expense 11,340 % 19,720 %
$ % $ %

b. The vertical analysis indicates that the cost of goods sold as a percent of sales ___ by 5 percentage points, while selling expenses ___ by 2 percentage points, and administrative expenses ___ by 1 percentage points. Thus, net income as a percent of sales ___ by 2 percentage points.

Solutions

Expert Solution

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

$5,67,000.00

100.0%

$4,93,000.00

100.0%

Cost of goods sold

$3,85,560.00

68.0%

$3,10,590.00

63.0%

Gross profit

$1,81,440.00

32.0%

$1,82,410.00

37.0%

Selling expenses

$   73,710.00

13.0%

$   73,950.00

15.0%

Administrative expenses

$   79,380.00

14.0%

$   64,090.00

13.0%

Total Operating expenses

$1,53,090.00

27.0%

$1,38,040.00

28.0%

Net operating income

$   28,350.00

5.0%

$   44,370.00

9.0%

Income tax expense

$   11,340.00

2.0%

$   19,720.00

4.0%

Net income

$   17,010.00

3.0%

$   24,650.00

5.0%

Requirement b

The vertical analysis indicates that the cost of goods sold as a percent of sales Increased by 5 percentage points, while selling expenses Decreased by 2 percentage points, and administrative expenses Increased by 1 percentage points. Thus, net income as a percent of sales Decreased by 2 percentage points.


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