Two income statements for Toby Sam Enterprises are shown below: $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\text { Toby Sam Enterprises }$
$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\text { Income Statement }$
$ \quad $$\text { For the Years } 2 \text { and } 1 \text { Ending December } 31$
$\begin{array}{l}
\hline \begin{array}{lll}
\
\text {Fees earned }\
\text {Operating expenses }\
\text {Operating income}\
\end{array}
\begin{array}{lll}
\underline {\text { Year 2 }} \
\$ 674,350 \
\underline {472,045} \
\underline {\$ 202,305 }\
\end{array}
\begin{array}{lll}
\underline {\text { Year } 1}\
\$ 520,600\
\underline {338,390}\
\underline {\$ 182,210}
\end{array}
\end{array}$
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: $ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\text { Toby Sam Enterprises }$
$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\text { Income Statement }$
$ \quad $$\text { For the Years } 2 \text { and } 1 \text { Ending December } 31$
$\begin{array}{l}
\hline \begin{array}{lll}
\
 \text {Fees earned }\
 \text {Operating expenses }\
 \text {Operating income}\
\end{array}
\begin{array}{lll}
\underline {\text { Year 2 }} \
\$ 674,350 \
\underline {472,045} \
\underline {\$ 202,305 }\
\end{array}
\begin{array}{lll}
\underline {\text { Year } 1}\
\$ 520,600\
\underline {338,390}\
\underline {\$ 182,210}
\end{array}
\end{array}$ 
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 prepare a vertical analysis, we need to calculate the percentage of each item relative to the total revenue. 
For Year 2, fees earned were $674,350 and total revenue was $674,350, so the percentage for fees earned would be:

$$\frac{Fees\ Earned}{Total\ Revenue} = \frac{\$674,\!350}{\$674,\!350} = 100\%$$

Similarly, for Year 1, fees earned were $520,600 and total revenue was $520,600, so the percentage for fees earned would be:

$$\frac{Fees\ Earned}{Total\ Revenue} = \frac{\$520,\!600}{\$520,\!600} = 100\%$$

For operating expenses and operating income, we'll use the same approach. The vertical analysis for Toby Sam Enterprises' income statements is:

$\begin{array}{|l|l|l|l|}
\hline & \textbf{Year 2} & \textbf{Year 1} & \textbf{Change} \ \hline 
\text{Fees earned} & 100\% & 100\% & - \ \hline
\text{Operating expenses} & 70\% & 65\% & +5\% \ \hline
\text{Operating income} & 30\% & 35\% & -5\% \ \hline
\end{array}$

We can see that operating income decreased as a percentage of revenue by 5%, so the answer is (C) decreased by 5%.

Two Income Statements for Toby Sam Enterprises Are Shown Below \quad

Two Income Statements for Toby Sam Enterprises Are Shown Below $\quad$