Ferrero Company reported the following information for the current year: $\begin{array}{|l|l|l|l|}
\hline \text { Account } & \text { Current year } & \text { Percentage } & \text { Prior year } \
\hline \text { Net sales revenue } & \$ 360,000 & 100 \% & \$ 300,000 \
\hline \text { COGS } & \$ 223,200 & ? & \$ 240,000 \
\hline \text { Gross Profit } & \$ 136,800 & 38.00 \% & \$ 60,000 \
\hline \text { Selling/General Exp. } & \$ 64,800 & 18.00 \% & \$ 12,000 \
\hline \text { Net income before tax } & \$ 72,000 & ? & \$ 48,000 \
\hline \text { Income Tax } & \$ 3,600 & 1.00 \% & \$ 3,000 \
\hline \text { Net Income } & \$ 68,400 & ? & \$ 45,000 \
\hline
\end{array}$

-What would a vertical analysis report with respect to current year net income before income tax and income tax expense?
A)Net income before tax of 20% and income tax of 1.00% of net sales revenue
B)An increase of both net income before income tax and income tax of 20%
C)An increase of $24,000 in net income before tax
D)An increase of $120,000 from prior to current year

Question

Ferrero Company reported the following information for the current year: $\begin{array}{|l|l|l|l|}
\hline \text { Account } & \text { Current year } & \text { Percentage } & \text { Prior year } \
\hline \text { Net sales revenue } & \$ 360,000 & 100 \% & \$ 300,000 \
\hline \text { COGS } & \$ 223,200 & ? & \$ 240,000 \
\hline \text { Gross Profit } & \$ 136,800 & 38.00 \% & \$ 60,000 \
\hline \text { Selling/General Exp. } & \$ 64,800 & 18.00 \% & \$ 12,000 \
\hline \text { Net income before tax } & \$ 72,000 & ? & \$ 48,000 \
\hline \text { Income Tax } & \$ 3,600 & 1.00 \% & \$ 3,000 \
\hline \text { Net Income } & \$ 68,400 & ? & \$ 45,000 \
\hline
\end{array}$
 
-What would a vertical analysis report with respect to current year net income before income tax and income tax expense?
A)Net income before tax of 20% and income tax of 1.00% of net sales revenue
B)An increase of both net income before income tax and income tax of 20%
C)An increase of $24,000 in net income before tax
D)An increase of $120,000 from prior to current year

Quizplus · Accepted Answer

A vertical analysis report expresses each item in a financial statement as a percentage of a base amount, typically net sales revenue. Therefore, we cannot determine whether there was an increase in net income before income tax and income tax expense or a dollar amount increase. However, we can determine the percentages by dividing net income before income tax by net sales revenue and income tax expense by net sales revenue. Given the information provided, net income before tax is 20% of net sales revenue and income tax expense is 1.00% of net sales revenue.

Ferrero Company Reported the Following Information for the Current Year