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# Income Statements and Vertical Analysis

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In 2010, Earthscope Company decided to sell its satellite sales division, even though the division had been profitable during the year. During 2010, the satellite division earned \$54,000 and the taxes on that income were \$12,500. The division was sold for a gain of \$750,000, and the taxes \$36,700. How would these amounts be reported on the income statement for the year ended December 31, 2010?

Bessie's Quilting Company reported the following amounts on its balance sheet at December 31, 2010:
Cash \$5,000
Accounts receivable, net 40,000
Inventory 35,000
Equipment, net 120,000
Total assets \$200,000
Perform a vertical analysis of the assets of Bessie's Quilting Company. Use total assets as the base. What information does the analysis provide?

#### Solution Summary

In this two-part exercise; (1) it is illustrated how a company's yearly earnings, income tax, and the capital gain resulting from the sale of one of the company's most profitable divisions are to be reported on the firm's income statement, and (2) the conclusions that can be reached from the vertical analysis of financial data taken from the firm's year-end balance sheet.

\$2.19

## Income Statement and Vertical Analysis of the Statement

Worry Company sells office supplies. The following information summarizes Best's operating activities for 2014:

Utilities for store \$6,000
Rent for store \$8,000
Sales commissions \$4,500
Purchases of merchandise \$54,000
Inventory on January 1, 2012 \$30,000
Inventory on December 31, 2012 \$20,500
Sales revenue \$108,000

Required: Prepare an income statement for Worry Company, a merchandiser, for the year ended December 31, 2014 using the format below. Please include a vertical analysis rounded to the nearest tenth of a percent.

Sales revenue
Cost of goods sold
Beginning inventory
Purchases
Cost of goods available for sale
Ending inventory
Cost of goods sold
Gross profit
Selling expenses
Sales commissions
General expenses
Rent expense
Utilities expense
Total operating expenses
Net income/(loss)

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