Preparing and Interpreting a Schedule for Horizontal and Vertical Analyses
According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 20.9 percent between 2007 and 2008. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended
December 31, 2008.
| 2008 | 2007 |
Sales Revenues | $98,913 | $121,761 |
Cost of Goods Sold | 59,249 | 71,583 |
Gross Profit | 39,664 | 50,178 |
Selling, General, and Administrative Expenses | 36,943 | 36,934 |
Interest Expense | 565 | 474 |
Income before Income Tax Expense | 2,156 | 12,770 |
Income Tax Expense | 1,024 | 5,540 |
Net Income | $ 1,132 | $ 7,230 |
Required:
1.Conduct a horizontal analysis by calculating the year-over-year changes in each line item, expressed in dollars and in percentages (rounded to one decimal place). How did the change in computer prices compare to the changes in Computer Tycoon’s sales revenues?
2.Conduct a vertical analysis by expressing each line as a percentage of total revenues (round to one decimal place). Excluding income tax, interest, and operating expenses, did Computer Tycoon earn more profit per dollar of sales in 2008 compared to 2007?
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