Vertical Analysis for Income Statement
For 20Y6, Fishing Experiences Inc. initiated a sales promotion campaign that included the expenditure of an additional $19,000 for advertising. At the end of the year, Colt Schultz, the president, is presented with the following condensed comparative income statement:
FISHING EXPERIENCES INC. Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5 |
|||
20Y6 | 20Y5 | ||
Sales | $695,000 | $598,000 | |
Cost of goods sold | (326,650) | (328,900) | |
Gross profit | $ 368,350 | $ 269,100 | |
Selling expenses | (152,900) | (119,600) | |
Administrative expenses | (62,550) | (77,740) | |
Total operating expenses | $ (215,450) | $ (197,340) | |
Operating income | $ 152,900 | $ 71,760 | |
Other revenue | 41,700 | 23,920 | |
Income before income tax | $ 194,600 | $ 95,680 | |
Income tax expense | (76,450) | (35,880) | |
Net income | $ 118,150 | $ 59,800 |
Instructions:
1. Prepare a comparative income statement for the two-year period, presenting a vertical analysis of each item in relationship to sales for each of the years.
Fishing Experiences Inc. | ||||
Comparative Income Statement | ||||
For the Years Ended December 31, 20Y6 and 20Y5 | ||||
20Y6 Amount | 20Y6 Percent | 20Y5 Amount | 20Y5 Percent | |
Sales | $695,000 | % | $598,000 | % |
Cost of goods sold | (326,650) | % | (328,900) | % |
Gross profit | $368,350 | % | $269,100 | % |
Selling expenses | $(152,900) | % | $(119,600) | % |
Administrative expenses | (62,550) | % | (77,740) | % |
Total operating expenses | $(215,450) | % | $(197,340) | % |
Operating income | $152,900 | % | $71,760 | % |
Other revenue | 41,700 | % | 23,920 | % |
Income before income tax | $194,600 | % | $95,680 | % |
Income tax expense | (76,450) | % | (35,880) | % |
Net income | $118,150 | % | $59,800 | % |
2. Based on the vertical analysis prepared in 1
which of the following statements is correct?
a. Costs other than selling expenses (cost of goods sold and
administrative expenses) improved as a percentage of sales.
b. Net income as a percentage of sales increased.
c. The sales promotion campaign appears to have been
successful.
d. Selling expenses as a percent of sales increased slightly
2. Net income as a percentage of sales increased.
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