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P3-20 Creek Enterprises

Common-size statement analysis A common-size income statement for Creek Enterprises? 2014 operations follows. Using the firm’s 2015 income statement presented in Problem 3?18, develop the 2015 common-size income statement and compare it with the 2014 statement. Which areas require further analysis and investigation?

Which areas require further analysis and investigation?

Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2014,
Sales revenue($35,000,000)100.0%
Less: Cost of goods sold65.9
Gross profits34.1%
Less: Operating expenses Selling expense12.7%
General and administrative expenses6.3
Lease expense0.6
Depreciation expense3.6
Total operating expense23.2
Operating profits10.9%
Less: Interest expense1.5
Net profits before taxes9.4%
Less: Taxes (rate 5 40%)3.8
Net profits after taxes5.6%
Less: Preferred stock dividends0.1
Earnings available for common stockholders5.5%

Solution:

Income Statement 2,0152015 Common Size Income Statement2014 Common Size income statementDifference
Sales Revenue$        30,000,000100.00%100.00%
Less: Cost of goods sold$        21,000,00070.00%65.90%4.10%
Gross profits$          9,000,00030.00%34.10%-4.10%
Less: Operating Expenses
Selling Expenses$          3,000,00010.00%12.70%-2.70%
General and administrative Expenses$          1,800,0006.00%6.30%-0.30%
Lease Expenses$              200,0000.67%0.60%0.07%
Depreciation Expenses$          1,000,0003.33%3.60%-0.27%
Total Operating Expenses$          6,000,00020.00%23.20%-3.20%
Operation profits$          3,000,00010.00%10.90%-0.90%
Less: Interest Expenses$          1,000,0003.33%1.50%1.83%
Net profits before taxes$          2,000,0006.67%9.40%-2.73%
Less: Taxes (rate=40%)$             800,0002.67%3.80%-1.13%
Net Profits after taxes$          1,200,0004.00%5.60%-1.60%
Less: Preferred Stock Dividends$              100,0000.33%0.10%0.23%
Earnings available for common stockholders$          1,100,0003.67%5.50%-1.83%

The first area to be considered is the gross profitability. Which has been decreased by 4.10 percent of the sales. The sales revenue has also declined in 2015 compared to the last year. It can be caused by the change in the sales mix or decrease in the sales price. On the other hand the cost of goods sold is also increased which can mean that there may be increase in the cost of the manufacturing or the purchase prices of the raw materials.

Compared to the gross profit the operating profits has been decreased by 0.90% of sales which means considering the lower revenue the operating expenses has also been declined which can be seen except for the lease expense which will surely be the same but is giving a difference because of the different revenue figures of both the years.

Similarly, the profits before tax, profits after tax and earnings available for common stockholders have been declined from 2014 to 2015. The dividends paid to the preferred stock are 0.33% in 2015 where they were 0.1% in 2015 which shows about three times more burden has been put on the revenues to pay the preference dividend. Overall the areas like cost of goods sold, General and administrative Expenses and the preferred stock dividends should be analyzed and investigated to find out the exact reasons behind their increase from the last year.

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