Osgood Company provided the following income statement for Year 1 and Year 2:?Year 2Year 1Sales$ 220,000$ 160,000Cost of goods sold___156,000__105,000Gross margin64,00055,000Less operating expenses:?? Selling and administrative expenses26,00015,000 Interest expense_____2,000____3,000Income before tax36,00037,000Income tax expense____10,800___11,100Net income$ 25,200$ 25,900Required:(a) Perform vertical analysis on Osgood's income statements for Year 1 and Year 2. Round your answer to one decimal place (i.e. 22.4%)(b) Comment on the results, comparing Year 1 to Year 2.
What will be an ideal response?
Answers will vary
(a)
| ? | Year 2 | Year 1 |
| Sales | 100.0% | 100.0% |
| Cost of goods sold | 70.9% | 65.6% |
| Gross margin | 29.1% | 34.4% |
| Less operating expenses: | ? | ? |
| Selling and administrative expenses | 11.8% | 9.4% |
| Interest expense | 0.9% | 1.9% |
| Income before tax | 16.4% | 23.1% |
| Income tax expense | 4.9% | 6.9% |
| Net income | 11.5% | 16.2% |
(b) The most important difference between Year 1 and Year 2 is that cost of goods sold was 65.6% of sales in Year 1 and 70.9% in Year 2. As a result, net income was 16.2% of sales in Year 1, and it fell to 11.5% in Year 2.
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