Question

The following information is available for the Memphis and Billings companies: $ Sales Cost of goods sold Operating expenses Total assets Stockholders' equity Memphis 946,400 654,200 244,600 1,140,000 340,000 Billings $1,147,200 732,200 301,000 1,150,000 380,000 Required a. Prepare a common size income statement for each company. b. Compute the return on assets and return on equity for each company. c. Which company is more profitable from the stockholders' perspective? d. One company is a high-end retailer, and the other operates a discount store. Which is the discounter? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Prepare a common size income statement for each company. (Round percentage answers to 1 decimal place.) MEMPHIS COMPANY AND BILLINGS COMPANY Common Size Income Statements Memphis % Billings %

Answer 1

Common size income statement is where the accounts in income statement are presented as percentage of sales
a.
Common size income statement is shown below
MEMPHIS COMPANY AND BILLINGS COMPANY
Common size income statements
	Memphis	%	Billings	%
Sales	$946,400	100.0%	$1,147,200	100.0%
Less: Cost of goods sold	$654,200	69.1%	$732,200	63.8%
Gross margin	$292,200	30.9%	$415,000	36.2%
Less: Operating expenses	$244,600	25.8%	$301,000	26.2%
Operating income	$47,600	5.0%	$114,000	9.9%
b.
Return on assets	Net income/Total assets
	Memphis	Billings
Operating income	$47,600	$114,000
Total assets	$1,140,000	$1,150,000
Return on assets	4.2%	9.9%
Return on equity ratio	Net income/Equity
	Memphis	Billings
Operating income	$47,600	$114,000
Stockholder's equity	$340,000	$380,000
Return on equity	14.0%	30.0%
c.
From stockholder's point of view Billings is more profitable as it earns higher return on equity
d.
Memphis operates as discount store due to lower gross and operating margin