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

A vertical analysis involves expressing each item on the income statement as a percentage of revenue.

For the first income statement: 
Revenue = 100% 
Cost of goods sold = 50% 
Gross profit = 50% 
Operating expenses = 30% 
Operating income = 20%

For the second income statement: 
Revenue = 100% 
Cost of goods sold = 40% 
Gross profit = 60% 
Operating expenses = 40% 
Operating income = 20%

As we can see from the vertical analysis, the operating income for both years is the same at 20% of revenue. Therefore, operating income has not increased or decreased as a percentage of revenue. However, the cost of goods sold decreased by 10% as a percentage of revenue, leading to an increase in gross profit.

Two Income Statements for Toby Sam Enterprises Are Shown Below