Vertical Analysis for Income Statement

For 20Y6, Fishing Experiences Inc. initiated a sales promotion campaign that included the expenditure of an additional $45,000 for advertising. At the end of the year, Colt Schultz, the president, is presented with the following condensed comparative income statement:

FISHING EXPERIENCES INC. Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5
	20Y6		20Y5
Sales	$1,200,000		$1,000,000
Cost of goods sold	(624,000)		(558,000)
Gross profit	$ 576,000		$ 442,000
Selling expenses	(120,000)		(75,000)
Administrative expenses	(50,000)		(50,000)
Total operating expenses	$ (170,000)		$ (125,000)
Operating income	$ 406,000		$ 317,000
Other revenue	30,000		30,000
Income before income tax	$ 436,000		$ 347,000
Income tax expense	(100,000)		(90,000)
Net income	$ 336,000		$ 257,000

Instructions:

Question Content Area

1. Prepare a comparative income statement for the two-year period, presenting a vertical analysis of each item in relationship to sales for each of the years. Round percentages to one decimal place.

Fishing Experiences Inc. Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5

	20Y6 Amount	20Y6 Percent	20Y5 Amount	20Y5 Percent
Sales	$1,200,000	fill in the blank f7a5e4082014fb0_1%	$1,000,000	fill in the blank f7a5e4082014fb0_2%
Cost of goods sold	(624,000)	fill in the blank f7a5e4082014fb0_3%	(558,000)	fill in the blank f7a5e4082014fb0_4%
Gross profit	$576,000	fill in the blank f7a5e4082014fb0_5%	$442,000	fill in the blank f7a5e4082014fb0_6%
Selling expenses	$(120,000)	fill in the blank f7a5e4082014fb0_7%	$(75,000)	fill in the blank f7a5e4082014fb0_8%
Administrative expenses	(50,000)	fill in the blank f7a5e4082014fb0_9%	(50,000)	fill in the blank f7a5e4082014fb0_10%
Total operating expenses	$(170,000)	fill in the blank f7a5e4082014fb0_11%	$(125,000)	fill in the blank f7a5e4082014fb0_12%
Operating income	$406,000	fill in the blank f7a5e4082014fb0_13%	$317,000	fill in the blank f7a5e4082014fb0_14%
Other revenue	30,000	fill in the blank f7a5e4082014fb0_15%	30,000	fill in the blank f7a5e4082014fb0_16%
Income before income tax	$436,000	fill in the blank f7a5e4082014fb0_17%	$347,000	fill in the blank f7a5e4082014fb0_18%
Income tax expense	(100,000)	fill in the blank f7a5e4082014fb0_19%	(90,000)	fill in the blank f7a5e4082014fb0_20%
Net income	$336,000	fill in the blank f7a5e4082014fb0_21%	$257,000	fill in the blank f7a5e4082014fb0_22%

Question Content Area

2. Based on the vertical analysis prepared in 1 which of the following statements is correct? a. Costs other than selling expenses (cost of goods sold and administrative expenses) improved as a percentage of sales. b. Net income as a percentage of sales increased. c. The sales promotion campaign appears to have been successful. d. Selling expenses as a percent of sales increased slightly