Chapter 12, Problem 1SSQ

To determine

Identify the correct option for the given statement.

Answer to Problem 1SSQ

b. Sales.

Explanation of Solution

Vertical analysis:

The comparison of an item of a financial statement against the total amount of the same financial statement, to determine the relation between the two items, is referred to as vertical analysis.

The income statement percentage is expressed from the percentage of sales. Because the vertical analysis of the income statement is prepared by fixing the net sales as base with 100 percentages, and from this net sale, each of the other item’s percentage is computed. Hence, in the vertical analysis of income statement, the net sales are assumed as a base amount.

Use the below formula to determine the percentage amount of each item in the income statement:

$\text{Income statement item percentage}=\frac{\text{Each item on Income statement}}{\text{Net sales}}\times \text{100}$

From the above explanation it is clear that option “a, c and d” are incorrect, only option “b” is correct.

Conclusion

Hence, the correct option is option b.