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Income statements for Gibson Company for Year 3 and Year 4 follow: GIBSON COMPANY Income Statements Year 4 Year 3 $200,600 143,600 Sales Cost of goods sold Selling expenses Administrative expenses Interest expense Total expenses Income before taxes 21,500 12,500 3,800 $181,400 $180,600 121,600 19,500 14,500 5,800 $161,400 19,200 19,200 3,500 $ 15,700 Income taxes expense 5,000 Net income $ 14,200 Required a. Perform a horizontal analysis, showing the percentage change in each income statement component between Year 3 and Year 4. b. Perform a vertical analysis, showing each income statement component as a percentage of sales for each year.

Income statements for Gibson Company for Year 3 and Year 4 follow: GIBSON COMPANY Income Statements Year 4 Year 3 $200,600 143,600 Sales Cost of goods sold Selling expenses Administrative expenses Interest expense Total expenses Income before taxes 21,500 12,500 3,800 $181,400 $180,600 121,600 19,500 14,500 5,800 $161,400 19,200 19,200 3,500 $ 15,700 Income taxes expense 5,000 Net income $ 14,200 Required a. Perform a horizontal analysis, showing the percentage change in each income statement component between Year 3 and Year 4. b. Perform a vertical analysis, showing each income statement component as a percentage of sales for each year.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Income statements for Gibson Company for Year 3 and Year 4 follow: **GIBSON COMPANY** *Income Statements* | | Year 4 | Year 3 | |---------------------------|---------|---------| | **Sales** | $200,600 | $180,600 | | **Cost of goods sold** | 143,600 | 121,600 | | **Selling expenses** | 21,500 | 19,500 | | **Administrative expenses** | 12,500 | 14,500 | | **Interest expense** | 3,800 | 5,800 | | | | | | **Total expenses** | $181,400 | $161,400 | | **Income before taxes** | 19,200 | 19,200 | | **Income taxes expense** | 5,000 | 3,500 | | | | | | **Net income** | $14,200 | $15,700 | **Required Analysis** a. **Horizontal Analysis**: Calculate the percentage change in each income statement component from Year 3 to Year 4. b. **Vertical Analysis**: Express each income statement component as a percentage of sales for each year.
Transcribed Image Text:Income statements for Gibson Company for Year 3 and Year 4 follow: **GIBSON COMPANY** *Income Statements* | | Year 4 | Year 3 | |---------------------------|---------|---------| | **Sales** | $200,600 | $180,600 | | **Cost of goods sold** | 143,600 | 121,600 | | **Selling expenses** | 21,500 | 19,500 | | **Administrative expenses** | 12,500 | 14,500 | | **Interest expense** | 3,800 | 5,800 | | | | | | **Total expenses** | $181,400 | $161,400 | | **Income before taxes** | 19,200 | 19,200 | | **Income taxes expense** | 5,000 | 3,500 | | | | | | **Net income** | $14,200 | $15,700 | **Required Analysis** a. **Horizontal Analysis**: Calculate the percentage change in each income statement component from Year 3 to Year 4. b. **Vertical Analysis**: Express each income statement component as a percentage of sales for each year.
### Vertical Analysis of Income Statement #### Overview: The objective is to perform a vertical analysis of Gibson Company's income statements. Each component is expressed as a percentage of sales for each year. This method allows for easier comparison of financial performance across different years. #### Instructions: - Enter each income statement component as a percentage of sales for both Year 4 and Year 3. - Percentages may not add exactly due to rounding. - Round answers to one decimal place (e.g., 0.234 should be entered as 23.4). #### Income Statement Components: 1. **Sales** - Base figure for calculating percentages of all other components. 2. **Cost of Goods Sold** - Percentage of sales representing the direct costs of producing goods sold. 3. **Selling Expenses** - Represents the cost incurred to sell products and services. 4. **Administrative Expenses** - Percentage of sales covering expenses related to general administration. 5. **Interest Expense** - Borrowing costs as a percentage of sales. 6. **Total Expenses** - Sum of all expenses as a percentage of sales. 7. **Income Before Taxes** - Earnings calculated before taxes, represented as a percentage of sales. 8. **Income Taxes Expense** - The share of income dedicated to taxes. 9. **Net Income** - The final profit, represented as a percentage of sales. Vertical analysis provides a clear understanding of how each element affects the overall sales and helps in comparing financial performance across different periods.
Transcribed Image Text:### Vertical Analysis of Income Statement #### Overview: The objective is to perform a vertical analysis of Gibson Company's income statements. Each component is expressed as a percentage of sales for each year. This method allows for easier comparison of financial performance across different years. #### Instructions: - Enter each income statement component as a percentage of sales for both Year 4 and Year 3. - Percentages may not add exactly due to rounding. - Round answers to one decimal place (e.g., 0.234 should be entered as 23.4). #### Income Statement Components: 1. **Sales** - Base figure for calculating percentages of all other components. 2. **Cost of Goods Sold** - Percentage of sales representing the direct costs of producing goods sold. 3. **Selling Expenses** - Represents the cost incurred to sell products and services. 4. **Administrative Expenses** - Percentage of sales covering expenses related to general administration. 5. **Interest Expense** - Borrowing costs as a percentage of sales. 6. **Total Expenses** - Sum of all expenses as a percentage of sales. 7. **Income Before Taxes** - Earnings calculated before taxes, represented as a percentage of sales. 8. **Income Taxes Expense** - The share of income dedicated to taxes. 9. **Net Income** - The final profit, represented as a percentage of sales. Vertical analysis provides a clear understanding of how each element affects the overall sales and helps in comparing financial performance across different periods.
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