PE 3-10A Vertical analysis

Two income statements for Fortson Company are shown below.

Fortson Company

Income Statements

For Years Ended December 31

                                                                    2012                             2011
Fees earned                                              $425,000                       $375,000
Operating expenses                                    263,500                          225,000
Operating income                                     $161,500                        $150,000
a. Prepare a vertical analysis of Fortson Company’s income statements.
b. Does the vertical analysis indicate a favorable or unfavorable trend?

Answer:
a.

Fortson Company 

Income Statements 

For Years Ended December 31 

                                                          2012                                     2011
                                              Amount           Percent             Amount          Percent
Fees earned....................      $425,000         100%              $375,000          100%
Operating expenses ......         263,500           62                   225,000             60
Operating income..........       $161,500          38%               $150,000             40%

b. An unfavorable trend of increasing operating expenses and decreasing operating income is indicated.