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 calculate the percentage of each item in the income statement relative to revenue.

For 2013: 
Operating income = $140,000 ÷ $2,800,000 = 5% 
Net income = $88,000 ÷ $2,800,000 = 3.14%

For 2012: 
Operating income = $150,000 ÷ $3,000,000 = 5% 
Net income = $80,000 ÷ $3,000,000 = 2.67%

As we can see, operating income decreased from 5% in 2012 to 4.5% in 2013, which represents a 10% decrease. Therefore, the correct answer is C) No, decreased by 5%.

Two Income Statements for PS Enterprises Are Shown Below