Question

1. 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	$580,000		$522,000
   Cost of goods sold	324,800		261,000
   Selling expenses	104,400		104,400
   Administrative expenses	110,200		93,960
   Income tax expense	17,400		26,100

   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	$580,000	%	$522,000	%
   Cost of goods sold	324,800	%	261,000	%
   Gross profit Income from operations Net income Total operating expenses	$	%	$	%
   Selling expenses	104,400	%	104,400	%
   Administrative expenses	110,200	%	93,960	%
   Gross profit Income from operations Net income Total operating expenses	$	%	$	%
   Gross profit Income from operations Net income Total operating expenses		%		%
   Income tax expense	17,400	%	26,100	%
   Gross profit Income from operations Net income Total operating expenses	$	%	$	%

   Feedback

   b. The vertical analysis indicates that the cost of goods sold as a percent of sales

   • increased
   • decreased
   by 6 percentage points, while selling expenses
   • increased
   • decreased
   by 2 percentage points, and administrative expenses
   • increased
   • decreased
   by 1 percentage points. Thus, net income as a percent of sales
   • increased
   • decreased
   by 3 percentage points.

Answer 1

a 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	580000	100	(580000/580000*100)	522000	100	(522000/522000*100)
Cost of Goods sold	324800	56	(324800/580000*100)	261000	50	(261000/522000*100)
Gross profit	255200			261000
Selling Expenses	104400	18	(104400/580000*100)	104400	20	(104400/522000*100)
Administrative Expenses	110200	19	(110200/580000*100)	93960	18	(93960/522000*100)
income from operations	40600			62640
Income tax expenses	17400	3	(17400/580000*100)	26100	5	(26100/522000*100)
Net income	23200	4	(23200/580000*100)	36540	7	(36540/522000*100)
b.
1. Cost of goods sold as a percentage of sale is increased (56% from 50%) by 6 % points
2. Selling expenses as a percentage of sale is decreased (18% from 20%) by 2 % points
3. Administrative expenses as a percentage of sale is increased (19% from 18%) by 1 % points
2. Net Income as a percentage of sale is decreased (4% from 7%) by 3 % points