Presented below is an income statement, with the past two years\' results presen

Question

Presented below is an income statement, with the past two years' results presented:

Prepare a vertical analysis of both 2016 and 2015. Display percentages to 3 decimal places (.654 = 65.4%). Discuss any line items from the income statement that may warrant further investigation from management.

2016 2015 Revenue $4,200,000 $4,000,000 Cost of goods sold $2,910,000 $2,800,000 Gross profit $1,290,000 $1,200,000 Selling cost $280,000 $250,000 Administrative cost $140,000 $120,000 Operating profit $870,000 $830,000 Interest expense $78,000 $80,000 Income before taxes $792,000 $750,000 Income taxes $277,200 $262,500 Net income $514,800 $487,500

Explanation / Answer

The vertical analysis is the proportional analysis of the financial statement, where each line item is expressed as a percentage of another item.

2016: Vertical Analysis

Revenue. $ 4200000. 100%

COGS. $ 2910000. 69.3%

Gross Profit. $ 1290000. 30.7%

Selling cost. $ 280000. 6.7%

Administrative cost. $ 140000. 3.3%

Operating profit. $ 870000. 20.7%

Interest expense. $ 78000. 1.9%

Income before tax. $ 792000. 18.9%

Income tax. $ 277200. 6.6%

Net income. $ 514800. 12.3%

The line item that would warrant further investigation by the management is cost of goods sold because it is 69% of the revenue.

2015 Vertical Analysis

Revenue. $ 4000000. 100%

COGS. $ 2800000. 70%

Gross Profit. $ 1200000. 30%

Selling cost. $ 250000. 6.3%

Administrative cost. $ 120000. 3%

Operating profit. $ 830000. 20.8%

Interest expense. $ 80000. 2%

Income before tax. $ 750000. 18.8%

Income tax. $ 262500. 6.6%

Net income. $ 514800. 12.2%

The line item that would warrant further investigation by the management is cost of goods sold because it is 70% of the revenue.

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