Two income statements for Hemlock Company follow:
Hemlock Company Income Statements For Years Ended December 31 2019 2018 Fees earned . . . . . . . . . . . . . . . . . . . . . . $725,000 $615,000 Operating expenses . . . . . . . . . . . . . . 435,000 356,700 Operating income . . . . . . . . . . . . . . . . $290,000 $258,300
a. Prepare a vertical analysis of Hemlock Company’s income statements.
b. Does the vertical analysis indicate a favorable or an unfavorable trend?
Answer:
HEMLOCK COMPANY
Income Statements
For Years Ended December 31
a.
Fees earned $725,000 100% $615,000 100%
Operating expenses 435,000 60% 356,700 58%
Operating income $290,000 40% $258,300 42%
b. An unfavorable trend of increasing operating expenses and decreasing operating income is indicated.