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	$583,000		$531,000
Cost of goods sold	332,310		276,120
Selling expenses	99,110		100,890
Administrative expenses	110,770		90,270
Income tax expense	17,490		26,550

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	$583,000	%	$531,000	%
Cost of goods sold	332,310	%	276,120	%
	$	%	$	%
Selling expenses	99,110	%	100,890	%
Administrative expenses	110,770	%	90,270	%
	$	%	$	%
		%		%
Income tax expense	17,490	%	26,550	%
	$	%	$	%

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 2 percentage points. Thus, net income as a percent of sales 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	$583,000	100%	$531,000	100%
Cost of goods sold	332,310	57%	276,120	52%
Gross Profit	$250690	43%	$254,880	48%
Selling expenses	99,110	17%	100,890	19%
Administrative expenses	110,770	19%	90,270	17%
Total expense	$209,880	36%	$191,160	36%
Operating income	$40,810	7%	$63,720	12%
Income tax expense	17,490	3%	26,550	5%
Net Income	$23,320	4%	$37,170	7%