The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

Example 12.1.7 Complete a vertical analysis and a horizontal analysis for 2007 for

the company whose income statements for 2006 and 2007 are given below.

Cattarauqua Ginseng Enterprises

2006 Income Statement

Sales $176,530


Cost of goods sold $62,500

Gross profi t $114,030


Expenses $78,595

Net income $35,435

Cattarauqua Ginseng Enterprises

2007 Income Statement

Sales $196,235


Cost of goods sold $78,090

Gross profi t $118,145


Expenses $59,677

Net income $58,468

Vertical Analysis: A vertical analysis calculates each component of the income statement as

a percent of net sales. We take the 2007 income statement, then, and calculate each cat-

egory as a percent of net sales, placing the results in a new column to the right. For example,

the percent for cost of goods sold would be $78,090/$196,235  39.79%. We do the same

for the other categories. The result is:

Cattarauqua Ginseng Enterprises

2007 Income Statement

Amount

Percent of Net

Sales

Sales $196,235 100.00%


Cost of goods sold $78,090 39.79%

Gross profi t $118,145 60.21%


Expenses $59,677 30.41%

Net income $58,468 29.79%

12.1 Income Statements 493

Sammy’s Lemonade Stand

Second Quarter 2007 Income Statement

2007 2006 Increase/(Decrease)

Sales $185.25 $165.75 $19.50 11.76%

Cost of goods sold

Lemons $34.60 $22.05 $12.55 56.92%

Sugar $12.25 $12.75 ($0.50) 
3.92%

Cups $20.15 $22.00 ($1.85) 
8.41%

Other $8.35 $8.50 ($0.15) 
1.76%

To tal cost of goods sold $75.35 $65.35 $10.05 15.39%

Gross profi t $109.90 $100.45 $9.45 9.41%

Operating expenses

Advertising $12.00 $4.00 $8.00 200.00%

Wages $31.00 $32.00 $1.00 
3.13%

Other $2.00 $2.00 $0.00 0.00%

To tal operating expenses $45.00 $38.00 $7.00 18.42%

Net income $64.90 $62.45 $2.45 3.92%