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 $4,000,000 $3,600,000 Cost of goods sold 2,280,000 1,872,000 Selling expenses 600,000 648,000 Administrative expenses 520,000 360,000 Income tax expense 240,000 216,000 a. Prepare an income statement in comparative form, stating each item for both years as a percent of sales. Round to the nearest whole percentage. 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 $4,000,000 % $3,600,000 % Cost of goods sold (2,280,000) % (1,872,000) % $ % $ % Selling expenses $(600,000) % $(648,000) % Administrative expenses (520,000) % (360,000) % $ % $ % $ % $ % Income tax expense (240,000) % (216,000) % $ % $ % b. The vertical analysis indicates that the cost of goods sold as a percent of sales by 5 percentage points, while selling expenses by 3 percentage points, and administrative expenses by 3 percentage points. Thus, net income as a percent of sales by 5 percentage points.

Innovation Quarter Inc.

a) Comparative Vertical Analysis of Income Statement

                                          Current Year     %         Previous Year     %

Sales                                  $4,000,000   100%      $3,600,000     100%

Cost of goods sold              2,280,000    57%         1,872,000      52%

Gross profit                         $1,720,000    43%       $1,728,000      48%

Selling expenses                    600,000     15%          648,000        18%

Administrative expenses       520,000     13%          360,000        10%

Income tax expense              240,000       6%           216,000         6%

After Tax Income                 $360,000       9%       $504,000         14%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 5 percentage points, while selling expenses decreased by 3 percentage points, and administrative expenses increased by 3 percentage points. Thus, net income as a percent of sales decreased by 5 percentage points.

Explanation:

Data and Calculations:

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                                        $4,000,000            $3,600,000

Cost of goods sold                    2,280,000               1,872,000

Selling expenses                          600,000                648,000

Administrative expenses             520,000                360,000

Income tax expense                    240,000                 216,000

Innovation Quarter Inc. can use this vertical analysis to express the relationship between each line item and the sales revenue.  The vertical analysis helps in ascertaining the percentage increases in each variable.  With the analysis, the management of Innovation Quarter Inc. can undertake further investigations to learn the causes of the different performances and learn ways to control them.