Answer: Please refer to Explanation
Explanation:
1. When using Vertical Analysis, every item in the Income statement is depicted as a percentage of sales.
Sporting Goods Vertical Analysis
Net Sales = 1,800,00/1,800,000 = 100%
Cost of Goods Sold = 1,040,000/1,800,000 = 57.7%
Gross Profit = 760,000 /1,800,000 = 42.2%
Operating Expenses = 450,000 /1,800,000 = 25%
Operating Income = 310,000/1,800,000 = 17.2%
Other Income (Expense) = 20,000 /1,800,000 = 1.1%
Income before tax = 330,000 /1,800,000 = 18.3%
Income tax Expense = 80,000/1,800,000 = 4.4%
Net Income = 250,000/1,800,000 = 13.9%
Sports Apparel Vertical Analysis
Net Sales = 970,000/970,000 = 100%
Cost of Goods Sold = 440,000/970,000 = 45.4%
Gross Profit = 530,000/970,000 = 54.6%
Operating Expenses = 340,000/970,000 = 35.0%
Operating Income = 190,000/970,000 = 19.6%
Other Income (Expense) = 15,000/970,000 = 1.54%
Income before tax = 175,000/970,000 = 18.0%
Income tax Expense = 70,000/970,000 = 7.2%
Net Income = 105,000/970,000 = 10.8%
2. Comparison using Vertical Analysis
- Sporting Goods earn a higher net income than Sport Apparel due to them paying a lower tax.
- Sports Apparel earns a higher Gross Profit than Sporting Goods due to them having a lower Cost of Goods sold.
- Sports Apparel have higher Operating Expenses than Sporting Goods but still have a higher Operating Income.
I have attached the income statement required for the question.
