Question

17-3

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	$509,000		$433,000
Cost of goods sold	300,310		225,160
Selling expenses	81,440		82,270
Administrative expenses	91,620		73,610
Income tax expense	15,270		21,650

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	$509,000	%	$433,000	%
Cost of goods sold	300,310	%	225,160	%
	$	%	$	%
Selling expenses	81,440	%	82,270	%
Administrative expenses	91,620	%	73,610	%
	$	%	$	%
		%		%
Income tax expense	15,270	%	21,650	%
	$	%	$	%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales   by 7 percentage points, while selling expenses   by 3 percentage points, and administrative expenses   by 1 percentage points. Thus, net income as a percent of sales   by 3 percentage points.

Answer 1

Common size income Statement is the Statement which contains the proportion of each element with the sales. Percent = Amount of Item / Sales Innovation Quarter Inc Comparative Income Statement Year ended December 31 Current Year Pervious year Current Year Percent Pervious year Percent Sales 509000 100.0% 433000 100.0% Cost of Goods Sold 300310 59.0% 225160 52.0% Gross Profit 208690 41.0% 207840 48.0% Selling Expenses 81440 16.0% 82270 19.0% Administrative Expenses 91620 18.0% 73610 17.0% Total opearting Expenses 173060 34.0% 155880 36.0% Income From opeartions 356301 7.0% 51960 12.0% income taxes Expneses 15270 3.0% 21650 5.0% Net income 203601 4.0% 30310 7.0% The Vertical analysis indicates that the Cost of Goods Sold As a Percent of Sales Increase by 7 Percentage Points While Selling Expeses Decrease by 3 Percentage Points and Administrative Expenses Increse by 1 Percentage Points Thus, Net income as a Percent of sales Decrease by 3 Percentage Points