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ID: 2471412 • Letter: D
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Vertical analysis
An analysis that compares each item in a current statement with a total amount within the same statement.
of income statement
Instructions
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Income Statement
none
Final Question
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View Mode Selection
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Instructions
For 2016, Indigo Company initiated a sales promotion campaign that included the expenditure of an additional $39,000 for advertising. At the end of the year, Lumi Neer, the president, is presented with the following condensed comparative income statement:
Question not attempted.
Indigo Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
2016
2015
2
Sales
$810,000.00
$500,000.00
3
Cost of goods sold
283,500.00
185,000.00
4
Gross profit
$526,500.00
$315,000.00
5
Selling expenses
$162,000.00
$90,000.00
6
Administrative expenses
56,700.00
45,000.00
7
Total operating expenses
$218,700.00
$135,000.00
8
Income from operations
$307,800.00
$180,000.00
9
Other income
72,900.00
45,000.00
10
Income before income tax
$380,700.00
$225,000.00
11
Income tax expense
210,600.00
130,000.00
12
Net income
$170,100.00
$95,000.00
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Income Statement
1. Prepare an income statement in comparative form, stating each item for both years as a percent of sales. Round your percentages to one decimal place. Enter all amounts as positive numbers.
Question not attempted.
Indigo Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
2016
2016
2015
2015
2
Amount
Percent
Amount
Percent
3
Sales
$810,000.00
$500,000.00
4
Cost of goods sold
283,500.00
185,000.00
5
Gross profit
$526,500.00
$315,000.00
6
Selling expenses
$162,000.00
$90,000.00
7
Administrative expenses
56,700.00
45,000.00
8
Total operating expenses
$218,700.00
$135,000.00
9
Income from operations
$307,800.00
$180,000.00
10
Other income
72,900.00
45,000.00
11
Income before income tax
$380,700.00
$225,000.00
12
Income tax expense
210,600.00
130,000.00
13
Net income
$170,100.00
$95,000.00
Solution
Indigo Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
1
2016
2016
2015
2015
2
Amount
Percent
Amount
Percent
3
Sales
$810,000.00
$500,000.00
4
Cost of goods sold
283,500.00
185,000.00
5
Gross profit
$526,500.00
$315,000.00
6
Selling expenses
$162,000.00
$90,000.00
7
Administrative expenses
56,700.00
45,000.00
8
Total operating expenses
$218,700.00
$135,000.00
9
Income from operations
$307,800.00
$180,000.00
10
Other income
72,900.00
45,000.00
11
Income before income tax
$380,700.00
$225,000.00
12
Income tax expense
210,600.00
130,000.00
13
Net income
$170,100.00
$95,000.00
Points:
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Final Question
2. Comment on the significant relationships revealed by the vertical analysis prepared in (1).
The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) selector 1
deteriorated
improved
as a percentage of sales. As a result, net income as a percentage of sales selector 2
increased
decreased
by 2 percentage points. The sales promotion campaign appears to have been selector 3
unsuccessful
successful
. While selling expenses as a percent of sales selector 4
increased
decreased
slightly, the selector 5
increased
decreased
cost was more than made up for by selector 6
increased
decreased
sales.
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Explanation
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Indigo Company
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
Explanation / Answer
1) Comparitive Income Statement 2016 2015 Amount % Amount % Sales 810000 100% 500000 100% Cost of goods sold 283500 35% 185000 37% Gross Profit 526500 65% 315000 63% Selling expenses 162000 20% 90000 18% Administrative expenses 56700 7% 45000 9% Total operating expenses 218700 27% 135000 27% Income from operations 307800 38% 180000 36% Other Income 72900 9% 45000 9% Income before income tax 380700 47% 225000 45% Income tax expense 210600 26% 130000 26% Net Income 170100 21% 95000 19% 2) The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) Improved as a percentage of sales As a result, net income as a percentage of sales increased by 2 percentage points The sales promotion campaign appears to have been successful While selling expenses as a percent of sales increased slightly Increased cost was more than made up for by increased sales