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	$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.

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	$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.