Given the following income statement data for Company X:\begin{align*}\text{Sales} & : \$200,000 \\\text{Cost of Goods Sold} & : \$120,000 \\\text{Operating Expenses} & : \$40,000 \\\end{align*}Perform a vertical analysis and determine the percentage that Operating Expenses represent of Sales (rounded to 1 decimal place).

• A. 20.0%
• B. 60.0%
• C. 40.0%
• D. 80.0%

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of vertical analysis. Vertical analysis involves expressing each item in a financial statement as a percentage of a base amount. In this case, Sales is the base amount, and we need to calculate the percentage of Operating Expenses relative to Sales.
2. Step 2: Identify the formula for calculating the percentage. The formula is: \( \text{Percentage} = \frac{\text{Operating Expenses}}{\text{Sales}} \times 100 \).
3. Step 3: Substitute the given values into the formula. Operating Expenses are \( \$40,000 \) and Sales are \( \$200,000 \). The formula becomes: \( \text{Percentage} = \frac{40,000}{200,000} \times 100 \).
4. Step 4: Perform the division first. Divide \( 40,000 \) by \( 200,000 \) to get the proportion of Operating Expenses to Sales.
5. Step 5: Multiply the result of the division by \( 100 \) to convert the proportion into a percentage. Round the final percentage to one decimal place as required.