Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}
& \underline{ 2015 } & \underline{ 2014 } \
\text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \
\text { Inventory } &24,000 & 32,000 \
\text {Total Assets } &900,000 & 760,000 \
\text { Net Sales } &760,000 & 540,000 \
\text { Cost of Goods Sold } &320,000 & 420,000
\end{array}$
-Refer to Rags to Riches.Which of the following would result from a vertical analysis of the company's income statement?
A)The accounts receivable turnover ratio is 7.76 in 2015.
B)Gross profit is 57.9% of net sales for 2015.
C)Cost of goods sold decreased $50,000 or 23.8% during 2015.
D)Net sales is 84.4% of total assets for 2015.

Question

Rags to Riches Selected data from the financial statements are provided below:
$\begin{array}{ll}
& \underline{ 2015 } &  \underline{ 2014 } \
 \text { Accounts Receivable } &\$ 120,000 & \$ 76,000 \
 \text { Inventory } &24,000 & 32,000 \
 \text {Total Assets  } &900,000 & 760,000 \
 \text { Net Sales } &760,000 & 540,000 \
 \text { Cost of Goods Sold } &320,000 & 420,000
\end{array}$ 
-Refer to Rags to Riches.Which of the following would result from a vertical analysis of the company's income statement?
A)The accounts receivable turnover ratio is 7.76 in 2015.
B)Gross profit is 57.9% of net sales for 2015.
C)Cost of goods sold decreased $50,000 or 23.8% during 2015.
D)Net sales is 84.4% of total assets for 2015.

Quizplus · Accepted Answer

Vertical analysis involves expressing each item in a financial statement as a percentage of a base amount. In this case, we can express each income statement item as a percentage of net sales. Therefore, the gross profit would be expressed as (Net Sales - Cost of Goods Sold) / Net Sales * 100%. From the information given, we know that Gross Profit for 2015 is $760,000 - $320,000 = $440,000. So, Gross Profit as a percentage of net sales for 2015 would be ($440,000 / $760,000) * 100% = 57.9%. Therefore, option B is correct.

Option A is incorrect because Accounts Receivable Turnover Ratio involves dividing net credit sales by average accounts receivable during a period, which is not possible to calculate with the given data.

Option C is incorrect because cost of goods sold didn't decreased in 50,000, it actually increased by 100,000 which is the difference between 2014 and 2015 data.

Option D is incorrect because net sales is 84.4% of total assets makes no sense since these two things are unrelated.

Rags to Riches Selected Data from the Financial Statements Are