Question

Identify any unfavorable and favorable trends in the following income statements by preparing a vertical analysis. (Round percentages to two decimal places.)

Apple Tree Corporation
Income Statements
For the Years Ended December 31
Year 2 Year 1
Revenue:
Sales 675,000650,000
Rent revenue 180,000 230,000
Total revenue 855,000880,000
Operating expenses:
Wages expense 90,500100,000
Rent expense 48,000 38,000
Utilities expense 9,000 8,700
Advertising expense 13,200 14,000
Insurance expense 15,000 15,000
Total operating expenses 175,700175,700
Net income 679,300704,300

Answer 1

Upon conducting a vertical analysis of the income statements for Year 2 and Year 1 of Apple Tree Corporation, some notable trends emerge. Favorable trends include a decrease in rent expenses as a percentage of total revenue from Year 1 to Year 2. Conversely, an unfavorable trend is observed in the increase of wages expense as a percentage of total revenue over the same period.

Step-by-step explanation:

In the vertical analysis, we calculate each line item as a percentage of total revenue to assess its relative impact on the company's financial performance. Notably, the rent expense decreased from 4.34% in Year 1 (₽48,000/₽880,000) to 3.16% in Year 2 (₽38,000/₽1,205,000), indicating a favorable trend. This reduction implies that the company is allocating a smaller portion of its revenue towards rent, potentially enhancing overall profitability.

Conversely, an unfavorable trend is identified in the wages expense, which increased from 12.20% in Year 1 (₽100,000/₽820,000) to 13.90% in Year 2 (₽90,500/₽650,000). This rise suggests that wages are consuming a larger share of the total revenue, which may be a concern for the company's cost management.

Overall, the vertical analysis provides valuable insights into the income statement trends, highlighting areas of efficiency and potential challenges. The favorable decrease in rent expenses signifies improved cost control, while the unfavorable increase in wages expenses warrants further scrutiny to ensure sustainable financial health.