The following income statement data for AT&T Inc. and Verizon Communications Inc. were taken from their recent annual reports (in millions):
AT&T Verizon
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,447 $127,079
Cost of services (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,611 49,931
Selling and marketing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,697 41,016
Depreciation and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,393 16,533
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,746 $ 19,599
a. Prepare a vertical analysis of the income statement for AT&T. Round to one decimal place.
b. Prepare a vertical analysis of the income statement for Verizon. Round to one decimal place.
c. Based on Requirements (a) and (b), how does AT&T compare to Verizon?
Answers:
a.
Revenues.................................................................. $132,447 100.0%
Cost of services (expense).......................................... 60,611 45.8%
Selling and marketing expense.................................... 39,697 30.0%
Depreciation and other expenses................................. 20,393 15.4%
Operating income...................................................... $ 11,746 8.8%
b.
Revenues.................................................................. $127,079 100.0%
Cost of services (expense).......................................... 49,931 39.3%
Selling and marketing expense.................................... 41,016 32.3%
Depreciation and other expenses................................. 16,533 13.0%
Operating income...................................................... $ 19,599 15.4%
c. AT&T’s operating income is 8.8% of revenues, while Verizon’s operating income to revenues is 15.4%. Verizon appears to be more efficient in generating operating income from revenues. AT&T’s cost of services is 45.8% of revenues, while Verizon’s is over six percentage points less at 39.3% of revenues. This difference is a largecontributor to Verizon’s superior operating income-to-revenues efficiency. The other two expense items essentially cancel each other out in that the selling and marketing expenses are 30.0% of revenues for AT&T, while Verizon’s are slightly larger at 32.3% of revenues. In contrast, the depreciation expense is 15.4% of revenues for AT&T and only 13.0% for Verizon. In summary, it appears that Verizon is able to generate more operating income per sales dollar, mostly because of a lower cost of services per sales dollar in comparison to AT&T.