Question

Ace Electric's income statement reports Sales of $100,000; Cost of goods sold of $46,000, Operating expenses of $34,000, Interest expense of $15,000, Income tax expense of $2,000, and Net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by
a. $15,000.
b. $100,000.
c. $2,000.
d. $46,000.
e. $34,000.
f. $3,000.
b

Answer 1

The correct answer is b) $100,000.

Vertical analysis is a type of financial statement analysis that shows each item on a statement as a percentage of a base figure. The vertical analysis involves presenting each line item on an income statement as a percentage of net sales and each line item on the balance sheet as a percentage of total assets.

To perform a vertical analysis of this income statement, you would divide each of these income statement line items by $100,000.

Sales = $100,000 / $100,000 = 100%

Cost of goods sold = $46,000 / $100,000 = 46%

Operating expenses = $34,000 / $100,000 = 34%

Interest expense = $15,000 / $100,000 = 15%

Income tax expense = $2,000 / $100,000 = 2%

Net income = $3,000 / $100,000 = 3%

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