Two income statements for Toby Sam Enterprises are shown below: Prepare a vertical analysis of Toby Sam Enterprises' income statements. Has operating income increased or decreased as a percentage of revenue?
A) increased by 5%
B) increased by 111%
C) decreased by 5%
D) decreased by 111%

Question

Two income statements for Toby Sam Enterprises are shown below:  Prepare a vertical analysis of Toby Sam Enterprises' income statements. Has operating income increased or decreased as a percentage of revenue?
A) increased by 5% 
B) increased by 111% 
C) decreased by 5% 
D) decreased by 111%

Quizplus · Accepted Answer

To perform vertical analysis, we calculate each line item as a percentage of revenue.

For the first income statement:

Revenue = $370,000
Cost of goods sold = $222,000,  which is 60% of revenue (222,000/370,000)
Gross profit = $148,000, which is 40% of revenue (148,000/370,000)
Operating expenses = $100,000, which is 27% of revenue (100,000/370,000)
Operating income = $48,000, which is 13% of revenue (48,000/370,000)
Net income = $37,000, which is 10% of revenue (37,000/370,000)

For the second income statement:

Revenue = $400,000
Cost of goods sold = $240,000, which is 60% of revenue (240,000/400,000)
Gross profit = $160,000, which is 40% of revenue (160,000/400,000)
Operating expenses = $92,000, which is 23% of revenue (92,000/400,000)
Operating income = $68,000, which is 17% of revenue (68,000/400,000)
Net income = $52,000, which is 13% of revenue (52,000/400,000)

By comparing the percentages of the two income statements, we can see that operating income has decreased by 5% as a percentage of revenue (from 13% to 17%). Therefore, the correct answer is C: decreased by 5%.

Two Income Statements for Toby Sam Enterprises Are Shown Below