Question

The following information is available for the Memphis and Billings companies:

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?

Sales Cost of goods sold Operating expenses Total assets Stockholders' equity Memphis $1,240,960 800, 480 338, 240 1,250,000 360,000 Billings $1,223, 680 878, 480 294, 100 1,490,000 350,000

Answer 1

	Common Size Income Statement
			Memphis	%	Billings	%
	Sales		$ 1,240,960.00	100.0%	$ 1,223,680.00	100%
Less:	Cost of Goods sold		$    800,480.00	64.5%	$    878,480.00	71.8%
	Gross Margin		$    440,480.00	35.5%	$    345,200.00	28.2%
Less:	Operating expenses		$    338,240.00	27.3%	$    294,100.00	24.0%
	Net Income		$    102,240.00	8.2%	$      51,100.00	4.2%

		Formula	Memphis			Billings
Return on assets		Net Income / Total Assets	$ 102240 / $ 1250000			$ 51100 / $ 1490000
			8.2%			3.4%
Return on equity		Net Income / Stockholder's Equity	$ 102240 / $ 360000			$ 51100 / $ 350000
			28.4%			14.6%

More profitable company =			Memphis
Discounter		=	Memphis

Is this okay?