Preparing Income Statements by Using Net Sales as the Base: Vertical Analysislt Jasmine Company provided the following income statements for its first 3 years of operation:

Year 1 Year 2 Year 3

Net sales $5,000,000 $4,500,000 $4,000,000

Less: Cost of goods sold (3,000,000) (3,250,000) (3,600,000)

Gross margin $2,000,000 $1,250,000 $400,000

Less: Operating expenses (1,420,000) (800,000) (165,000)

Income taxes (232,000) (180,000) (134,000)

Net income $348,000 $270,000 $101,000

Required: Prepare common-size income statements by using net sales as the base. Round answers to the nearest whole percentage.

Answer and Explanation:

The preparation of common-size income statements by using net sales as the base is shown below:-

Jasmine company

Common-size Income Statement

Year 1 Year 2 Year 3

$ % $ % $ %

Sales 5,000,000 100 4,500,000 100 4,000,000 100

Cost of Goods

Sold (3,000,000) 60 (3,250,000) 72.22 (3,600,000) 90

Gross

Profit 2,000,000 40 1,250,000 27.78 400,000 10

Operating

Expenses (1,420,000) 28.4 (800,000) 17.78 (165,000) 4.12

Income

Taxes (232,000) 4.64 (180,000) 4 (134,000) 3.35

Net Income $348,000 6.96 $270,000 6 $101,000 2.53

Working Note:-

For Year 1

Sales = 5,000,000 : 5,000,000 * 100

Cost of Goods Sold = 3,000,000 : 5,000,000 * 100

Gross Profit = 2000,000 : 5,000,000 * 100

Operating Expenses = 1,420,000 : 5,000,000 * 100

Income Taxes = 232,000 : 5,000,000 * 100

Net Income = 348,000 : 5,000,000 * 100

For Year 2

Sales = 4,500,000 : 4,500,000 * 100

Cost of Goods Sold = 3,250,000 : 4,500,000 * 100

Gross Profit = 1,250,000 : 4,500,000 * 100

Operating Expenses = 800,000 : 4,500,000 * 100

Income Taxes = 180,000 : 4,500,000 * 100

Net Income = 270,000 : 4,500,000 * 100

For Year 3

Sales = 4,000,000 : 4,000,000 * 100

Cost of Goods Sold = 3,600,000 : 4,000,000 * 100

Gross Profit = 400,000 : 4,000,000 * 100

Operating Expenses = 165,000 : 4,000,000 * 100

Income Taxes = 134,000 : 4,000,000 * 100

Net Income = 101,000 : 4,000,000 * 100