Two income statements for PS Enterprises are shown below: Prepare a vertical analysis of PS Enterprises' income statements. Has operating income increased or decreased as a percentage of revenue?
A) Yes, increased by 5%.
B) Yes, increased by 111%.
C) No, decreased by 5%.
D) None are correct.

Question

Two income statements for PS Enterprises are shown below:  Prepare a vertical analysis of PS Enterprises' income statements. Has operating income increased or decreased as a percentage of revenue?
A) Yes, increased by 5%. 
B) Yes, increased by 111%. 
C) No, decreased by 5%. 
D) None are correct.

Quizplus · Accepted Answer

To perform vertical analysis, we need to express each item on the income statement as a percentage of revenue. 
For the year 2 income statement, 
Operating income = 350,000 / 1,500,000 = 23.33% 
Net income = 175,000 / 1,500,000 = 11.67%

For the year 1 income statement, 
Operating income = 300,000 / 1,600,000 = 18.75% 
Net income = 150,000 / 1,600,000 = 9.38%

By comparing the two percentages for operating income, we can see that it has decreased from 23.33% to 18.75%, which is a decrease of about 4.58%. Therefore, the correct answer is C, "No, decreased by 5%."

Two Income Statements for PS Enterprises Are Shown Below