The following income statement data for A T&T Inc. and Verizon Communications Inc. were taken from their recent annual reports (in millions): T&T Verizon
Revenues $132,447 $127,079
Cost of services (expense) (60,611) (49,931)
Selling and marketing expense (39,697) (41,016)
Depreciation and other expenses ... (20,393) (16,533)
Operating income $ 11,746 $ 19,599
a. Prepare a vertical analysis of the income statement for AT&T. (Round to one decimal place.)
b. Prepare a vertical analysis of the income statement for Verizon. (Round to one decimal place.)
c. Based on Requirements A and B, how does AT&T compare to Verizon?

a. See the explanation below.

b. See the explanation below.

c. we have:

1. AT&T's Cost of services (expense) is 6.47% greater than Verizon's.

2. AT&T's Selling and marketing expenses is 2.30% less than Verizon's.

3. AT&T's Depreciation and other expenses is 2.39% greater than Verizon's.

4. AT&T's Operating income is 6.55% less than Verizon's.

Explanation:

The income statement vertical analysis is done by dividing each of the line item in the income statement by the revenue and then multiply by 100. That is:

Income statement vertical analysis formula = (Line item / Revenue) * 100 (1)

Using equation (1), we can now proceed as follows:

a. Prepare a vertical analysis of the income statement for AT&T. (Round to one decimal place.)

This can be presented as follows:

AT&T

Vertical Analysis of the Income Statement

Particulars                                              $'Million               (%)    

Revenues                                               132,447              100.00

Cost of services (expense)                    (60,611)                45.76

Selling and marketing expense            (39,697)              29.97

Depreciation and other expenses        (20,393)              15.40

Operating income                                     11,746                 8.87

b. Prepare a vertical analysis of the income statement for Verizon. (Round to one decimal place.)

This can be presented as follows:

Verizon

Vertical Analysis of the Income Statement

Particulars                                              $'Million               (%)    

Revenues                                                127,079            100.00

Cost of services (expense)                     (49,931)             39.29

Selling and marketing expense              (41,016)             32.28

Depreciation and other expenses         (16,533)              13.10

Operating income                                    19,599              15.42

c. Based on Requirements A and B, how does AT&T compare to Verizon?

This can be done as follows:

AT&T and Verizon

Comparison of the Vertical Analysis of the Income Statement

Particulars                                        AT&T  (%)        Verizon (%)      Diff. (%)    

Revenues                                             100.00             100.00            0.00

Cost of services (expense)                   45.76               39.39             6.47

Selling and marketing expenses         29.97              32.28            (2.30)

Depreciation and other expenses       15.40                13.10              2.39

Operating income                                  8.87                15.42            (6.55)

Note that Diff (%) is AT&T (%) minus Verizon (%)

From the above, we have:

1. AT&T's Cost of services (expense) is 6.47% greater than Verizon's.

2. AT&T's Selling and marketing expenses is 2.30% less than Verizon's.

3. AT&T's Depreciation and other expenses is 2.39% greater than Verizon's.

4. AT&T's Operating income is 6.55% less than Verizon's.

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