Question

Exercise 12-2A Prepare vertical analysis (LO12-1) 

The income statements for Federer Sports Apparel for 2022 and 2021 are presented below. 

Required: 

Prepare a vertical analysis of the data for 2022 and 2021. (Round your percentage answers to 1 decimal place.) 

Exercise 12-3A Prepare horizontal analysis (L012-2) 

The income statements for Federer Sports Apparel for 2022 and 2021 are presented below.

Required: 

Prepare a horizontal analysis for 2022 using 2021 as the base year. (Decreases should be indicated with a minus sign. Round your percentage answers to 1 decimal place.) 

Answer 1

1) The vertical analysis of income statements for the year 2021 and 2022 is shown as follows:-

FEDERER SPORTS APPAREL
Income Statement
For the Years Ending December 31
	2022		2021
	Amount	%	Amount	%
Net Sales	19,400,000	100.0	16,100,000	100.0
Cost of goods sold	12,920,400	66.6	7,373,800	45.8
Gross profit	6,479,600	33.4	8,726,200	54.2
Operating expenses	1,765,400	9.1	1,336,300	8.3
Depreciation expense	1,144,600	5.9	1,143,100	7.1
Inventory write-down	329,800	1.7	0	0
Loss (litigation)	1,668,400	8.6	289,800	1.8
Income before tax	1,571,400	8.1	5,957,000	37.0
Income tax expense	582,000	3.0	2,173,500	13.5
Net income	989,400	5.1	3,783,500	23.5

The percentage of each item is calculated by dividing the respective amount by net sales (As net sales is considered as base).

2) The horizontal analysis for the company using 2021 as base year is shown as follows:-

FEDERER SPORTS APPAREL
Income Statement
For the Years Ending December 31 (Amounts in $)
	Year		Increase (Decrease)
	2022 (A)	2021 (B)	Amount (C = A-B)	% (C/B*100)
Net Sales	18,300,000	15,000,000	3,300,000	22.0
Cost of goods sold	13,395,600	6,705,000	6,690,600	99.8
Gross profit	4,904,400	8,295,000	(3,390,600)	(40.9)
Operating expenses	1,464,000	1,080,000	384,000	35.6
Depreciation expense	878,400	878,400	0	0.0
Inventory write-down	109,800		109,800	-
Loss (litigation)	1,372,500	360,000	1,012,500	281.3
Income before tax	1,079,700	5,976,600	(4,896,900)	(81.9)
Income tax expense	347,700	1,860,000	(1,512,300)	(81.3)
Net income	732,000	4,116,600	(3,384,600)	(82.2)