Two income statements for Hemlock Company are shown below.

Two income statements for Hemlock Company are shown below.


Hemlock Company
Income Statements
For Years Ended December 31
2014 2013
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:

a.
 HEMLOCK COMPANY
Income Statements
For Years Ended December 31
2014 2013
Amount Percent Amount Percent
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.