Vertical analysis expresses each item in the income statement as a percentage of a base item (in this case, fees earned). Here’s how to perform a vertical analysis for Cornea Company’s income statements for the years 20Y9 and 20Y8:
Cornea Company
Vertical Analysis of Income Statements
For the Years Ended December 31
| Line Item Description | 20Y9 | % of Fees Earned (20Y9) | 20Y8 | % of Fees Earned (20Y8) | |-----------------------|----------------|-------------------------|----------------|-------------------------| | Fees Earned | $1,640,000 | 100.00% | $1,300,000 | 100.00% | | Expenses | (869,200) | (53.01%) | (715,000) | (55.00%) | | Net Income | $770,800 | 47.00% | $585,000 | 45.00% |
Calculation of Percentages:
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For Year 20Y9:
- % of Fees Earned = (Line Item / Fees Earned) × 100
- Expenses: \((-869,200 / 1,640,000) × 100 = -53.01%\)
- Net Income: \((770,800 / 1,640,000) × 100 = 47.00%\)
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For Year 20Y8:
- Expenses: \((-715,000 / 1,300,000) × 100 = -55.00%\)
- Net Income: \((585,000 / 1,300,000) × 100 = 45.00%\)
Summary:
This vertical analysis shows that in 20Y9, expenses constituted approximately 53.01% of fees earned, while net income was 47.00%. In contrast, in 20Y8, expenses were higher as a percentage of fees earned at 55.00%, and net income was lower at 45.00%. This indicates a positive trend for Cornea Company in terms of profitability from 20Y8 to 20Y9.
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