Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 14 Financial Statement Analysis 675

For 2008, Industrial Sanitation Systems, Inc. initiated a sales promotion campaign that included

the expenditure of an additional $26,000 for advertising. At the end of the year, Alex Gonzalez,

the president, is presented with the condensed comparative income statement below.

Alternate Problem
14-2B

Vertical analysis for income
statement

Goal 1

1. Net loss, 2008, 4.28%

Pet Care, Inc.

Comparative Income Statement

For the Years Ended December 31, 2007 and 2006

2007 2006

Sales $76,200 $61,000

Sales returns and allowances 1,200 1,000

Net sales $75,000 $60,000

Cost of goods sold 42,000 35,000

Gross profit $33,000 $25,000

Selling expenses $13,800 $12,000

Administrative expenses 9,000 8,000

Total operating expenses $22,800 $20,000

Income from operations $10,200 $ 5,000

Other income 500 500

Income before income tax $10,700 $ 5,500

Income tax expense 2,400 1,200

Net income $ 8,300 $ 4,300

Industrial Sanitation Systems, Inc.

Comparative Income Statement

For the Years Ended December 31, 2008 and 2007

2008 2007

Sales $144,000 $128,000

Sales returns and allowances 4,000 3,000

Net sales $140,000 $125,000

Cost of goods sold 80,000 72,000

Gross profit $ 60,000 $ 53,000

Selling expenses $ 56,000 $ 30,000

Administrative expenses 14,000 12,000

Total operating expenses $ 70,000 $ 42,000

Income from operations $ (10,000) $ 11,000

Other income 2,000 1,800

Income before income tax $ (8,000) $ 12,800

Income tax expense (benefit) (2,000) 3,000

Net income (loss) $ (6,000) $ 9,800

Instructions

1. Prepare a comparative income statement for the two-year period, presenting an analysis of
   each item in relationship to net sales for each of the years. Round to two decimal places.


2. To the extent the data permit, comment on the significant relationships revealed by the ver-
   tical analysis prepared in (1).