Question

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

Becker Corporation
Income Statements
For the Years Ended December 31
Year 2 Year 1
Revenues 394,000 212,500
Operating expenses:
Wages expense 79,000 65,000
Rent expense 19,000 18,000
Utilities expense 21,000 14,200
Interest expense 7,500 7,800
Total operating expenses 126,500 105,000
Net income 267,500 107,500

Answer 1

A vertical analysis of Becker Corporation's income statements shows favorable trends with wages taking a smaller percentage of revenue in Year 2 compared to Year 1, while an unfavorable trend is observed in increasing utilities expenses. The net income ratio has improved remarkably, indicating a favorable profitability trend.

Step-by-step explanation:

The student is asking how to identify favorable and unfavorable trends in the provided income statements of Becker Corporation by performing a vertical analysis. Vertical analysis compares each line item to a base amount within the same financial period, which enables an assessment of trends within financial statements. In this case, the base amount is the total revenue for each year.

Performing the vertical analysis, you calculate each expense as a percentage of total revenues. For example, wages expense in Year 1 is 30.61% of revenues ($79,000/$212,500), while in Year 2 it is 20.05% ($79,000/$394,000). This indicates a favorable trend for wage expense as it takes up a smaller percentage of revenue in Year 2. However, utility expenses increased from 6.68% in Year 1 to 5.33% in Year 2, which represents an unfavorable trend. Lastly, net income as a percentage of revenue improved significantly from 50.59% in Year 1 to 67.89% in Year 2, indicating a highly favorable profitability trend.