Chapter 9, Problem 9.1E

To determine

Concept Introduction:

Vertical Analysis:

Vertical Analysis is used to analyses the % of items in statement for a particular period as the % of total amount. Vertical Analysis is done for particular period for different items. For example analysis of % of assets as % of Total assets for a particular year is done using the Vertical analysis.

Requirement-a:

To Prepare:

A comparative income statement using Vertical analysis

Answer to Problem 9.1E

A comparative income statement using Vertical analysis is as follows:

Comparative income statement using Vertical analysis
	20Y8		20Y8
	$	Common Size %	$	Common Size %
Sales	$ 900,000	100.0%	$ 725,000	100.0%
Cost of Goods sold	$(558,000)	-62.0%	$(435,000)	-60.0%
Gross Profit	$ 342,000	38.0%	$ 290,000	40.0%
Selling expenses	$(117,000)	-13.0%	$(116,000)	-16.0%
Administrative expenses	$ (63,000)	-7.0%	$ (63,250)	-8.7%
Income Tax Expense	$ (76,500)	-8.5%	$ (58,000)	-8.0%
Net Income	$ 85,500	9.5%	$ 52,750	7.3%

Explanation of Solution

A comparative income statement using Vertical analysis is prepared as follows:

Comparative income statement using Vertical analysis
	20Y8		20Y8
	$	Common Size %	$	Common Size %
	A	B = A / Sales	C	D = C / Sales
Sales	$ 900,000	100.0%	$ 725,000	100.0%
Cost of Goods sold	$(558,000)	-62.0%	$(435,000)	-60.0%
Gross Profit	$ 342,000	38.0%	$ 290,000	40.0%
Selling expenses	$(117,000)	-13.0%	$(116,000)	-16.0%
Administrative expenses	$ (63,000)	-7.0%	$ (63,250)	-8.7%
Income Tax Expense	$ (76,500)	-8.5%	$ (58,000)	-8.0%
Net Income	$ 85,500	9.5%	$ 52,750	7.3%

To determine

Concept Introduction:

Vertical Analysis:

Vertical Analysis is used to analyses the % of items in statement for a particular period as the % of total amount. Vertical Analysis is done for particular period for different items. For example analysis of % of assets as % of Total assets for a particular year is done using the Vertical analysis.

Requirement-a:

To Indicate:

Significant changes shown by the comparative income statement

Answer to Problem 9.1E

Significant changes shown by the comparative income statement are as follows:

• Cost of goods sold % has increased in the year 20Y8 as compared with the year 20Y7
• Selling expenses % has reduced in the year 20Y8 as compared with the year 20Y7
• Income Tax Expense % has increased in the year 20Y8 as compared with the year 20Y7

Explanation of Solution

A comparative income statement using Vertical analysis is prepared as follows:

Comparative income statement using Vertical analysis
	20Y8		20Y8
	$	Common Size %	$	Common Size %
	A	B = A / Sales	C	D = C / Sales
Sales	$ 900,000	100.0%	$ 725,000	100.0%
Cost of Goods sold	$(558,000)	-62.0%	$(435,000)	-60.0%
Gross Profit	$ 342,000	38.0%	$ 290,000	40.0%
Selling Expense	$(117,000)	-13.0%	$(116,000)	-16.0%
Administrative expenses	$ (63,000)	-7.0%	$ (63,250)	-8.7%
Income Tax Expense	$ (76,500)	-8.5%	$ (58,000)	-8.0%
Net Income	$ 85,500	9.5%	$ 52,750	7.3%

Significant changes shown by the comparative income statement are as follows:

• Cost of goods sold % has increased in the year 20Y8 as compared with the year 20Y7
• Selling expenses % has reduced in the year 20Y8 as compared with the year 20Y7
• Income Tax Expense % has increased in the year 20Y8 as compared with the year 20Y7