Asked by Zheng Shouyi on May 07, 2024
Verified
Two income statements for Danielle's Design Services are shown below: 
(a) Prepare a vertical analysis of Danielle's Design Services income statements.(b) What types of trends are indicated: favorable or unfavorable?
(c) What other information would enhance the analysis?
Vertical Analysis
A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities, and equity) in a balance sheet is represented as a proportion of the total account.
Income Statements
A financial report summarizing a company's revenues, expenses, and profits over a specified period.
Trends
General directions in which something is developing or changing, often identified through the analysis of data over periods of time.
- Construct altered trial balances and recognize their significance in the formulation of financial statements.
- Perform vertical analysis on financial statements to identify trends and indicate financial health.
Verified Answer
RK
Roxane Keely-RaynerMay 10, 2024
Final Answer :
(a) 
*Differences due to rounding
(b) The vertical analysis shows both favorable and unfavorable trends. The increase in wages expense of 2.4% (33.2%− 30.8%) is unfavorable. The decrease in supplies expense of 4.2% (14.2% − 10.0%) and miscellaneous expense of 0.9% (2.4% − 1.5%) are both favorable. Rent as a percentage of fees earned stayed relatively constant. The net result is favorable - an increase in net income as a percentage of fees earned from 37.2% to 39.6%.(c) The analysis could be enhanced by comparisons with industry averages.
*Differences due to rounding(b) The vertical analysis shows both favorable and unfavorable trends. The increase in wages expense of 2.4% (33.2%− 30.8%) is unfavorable. The decrease in supplies expense of 4.2% (14.2% − 10.0%) and miscellaneous expense of 0.9% (2.4% − 1.5%) are both favorable. Rent as a percentage of fees earned stayed relatively constant. The net result is favorable - an increase in net income as a percentage of fees earned from 37.2% to 39.6%.(c) The analysis could be enhanced by comparisons with industry averages.
Learning Objectives
- Construct altered trial balances and recognize their significance in the formulation of financial statements.
- Perform vertical analysis on financial statements to identify trends and indicate financial health.