Question

A​ common-size income statement for Creek​ Enterprises' 2018 operations follows:

Creek Enterprises Income Statement for the Year Ended December 31, 2018                  
Sales revenue ($34,966,000)           100.0   %  
Less: Cost of goods sold           65.6      
Gross profits            34.4   %  
Less: Operating expenses                  
Selling expense    12.7   %          
General and administrative expenses    6.3              
Lease expense    0.5              
Depreciation expense   3.8              
Total operating expense           23.3      
Operating profits            11.1   %  
Less: Interest expense           1.4      
Net profits before taxes            9.7   %  
Less: Taxes (rate=21%)           2.0      
Net profits after taxes            7.7   %  
Less: Preferred stock dividends           0.2      
Earnings available for common stockholders            7.5   %  

2019 Income Statement

Creek Enterprises Income Statement for the Year Ended December 31, 2019          
Sales revenue        $29,960,000  
Less: Cost of goods sold       20,979,000  
Gross profits        $8,981,000  
Less: Operating expenses          
Selling expense    $2,969,000      
General and administrative expenses    1,794,000      
Lease expense    217,000      
Depreciation expense   1,038,000      
Total operating expense       6,018,000  
Operating profits        $2,963,000  
Less: Interest expense       968,000  
Net profits before taxes        $1,995,000  
Less: Taxes (rate=21%)       418,950  
Net profits after taxes        $1,576,050  
Less: Preferred stock dividends       103,000  
Earnings available for common stockholders        $1,473,050  

Creek Enterprises
Common-Size Income Statement
for the Years Ended December 31, 2018 and December 2019
	2019				2018
Sales revenue				%			100.0	%
Less: Cost of goods sold							65.6
Gross profits				%			34.4	%
Less: Operating expenses
Selling expense		%			12.7	%
General and administrative expenses					6.3
Lease expense					0.5
Depreciation expense					3.8
Total operating expense							23.3
Operating profits				%			11.1	%
Less: Interest expense							1.4
Net profits before taxes				%			9.7	%
Less: Taxes (rate = 21%)							2.0
Net profits after taxes				%			7.7	%
Less: Preferred stock dividends							0.2
Earnings available for common stockholders				%			7.5	%

Using the​ firm's 2019 income statement develop the 2019 ​common-size income statement and compare it to the  2018 statement.

Which areas require further analysis and​ investigation?

Provide your evaluation based on the​ common-size income​ statements: ​ (Select all the choices that​ apply.)

A) Selling expense has increased due to the increase in cost of goods sold.

B) Sales have declined and cost of goods sold has increased as a percentage of​ sales, probably due to a loss of productive efficiency.

C)The level of interest as a percentage of sales has increased​ significantly; this suggests that the firm has too much debt.

D) Operating expenses have decreased as a percentage of​ sales; this appears favorable unless this decline has contributed toward the fall in sales.

E) Further analysis should be directed at the increased cost of goods sold and the high debt level.

Answer 1

Solution:
Creek Enterprises
Common size Income Statement
					2018	Percentage	Working		2019	Percentage	Working
Sales Revenue				$	34966000	100%	(34966000*100%)	$	29960000	100%
Less: Cost of Goods sold				$	-22937696	-65.60%	(34966000*65.6%)	$	-20979000	-70.02%	(20979000/29960000*100)
Gross Profit			a	$	12028304	34.40%	(34966000*34.4%)	$	8981000	29.98%	(8981000/29960000*100)
Less:Operating Expenses
Selling Expense				$	4440682	12.70%	(34966000*12.70%)	$	2969000	9.91%	(2969000/29960000*100)
General and administrative Expense				$	2202858	6.30%	(34966000*6.30%)	$	1794000	5.99%	(1794000/29960000*100)
Lease Expense				$	174830	0.50%	(34966000*0.50%)	$	217000	0.72%	(217000/29960000*100)
Depreciation Expense				$	1328708	3.80%	(34966000*3.80%)	$	1038000	3.46%	(1038000/29960000*100)
Total Operating Expense			b	$	8147078	23.30%	(34966000*23.30%)	$	6018000	20.09%	(6018000/29960000*100)
Operating Profits			(a-b)	$	3881226	11.10%	(34966000*11.10%)	$	2963000	9.89%	(2963000/29960000*100)
Less: Interest Expense				$	-489524	-1.40%	(34966000*1.40%)	$	-968000	-3.23%	(968000/29960000*100)
Net Profit before taxes				$	3391702	9.70%	(34966000*9.70%)	$	1995000	6.66%	(1995000/29960000*100)
Less: Taxes				$	-699320	-2%	(34966000*2%)	$	-418950	-1.40%	(418950/29960000*100)
Net Profit after taxes				$	2692382	7.70%	(34966000*7.70%)	$	1576050	5.26%	(1576050/29960000*100)
Less: Preferred stock dividends				$	-69932	-0.20%	(34966000*0.20%)	$	-103000	-0.34%	(103000/29960000*100)
Earnings available for common stockholders				$	2622450	7.50%	(34966000*7.50%)	$	1473050	4.92%	(1473050/29960000*100)
B) Sales have declined and cost of goods sold has increased as a percentage of​ sales, probably due to a loss of productive efficiency.
					2018	2019
Sales				$	34966000	29960000
Cost of Goods sold				$	22937696	20979000
C)The level of interest as a percentage of sales has increased​ significantly; this suggests that the firm has too much debt.
					2018	2019
Interest				$	489524	968000
Interest as a percentage of sales					1.40%	3.23%
D) Operating expenses have decreased as a percentage of​ sales; this appears favorable unless this decline has contributed toward the fall in sales.
					2018	2019
Operating Expense				$	8147078	6018000
Operating Expense as a percentage of sales					23.3	20.09
E) Further analysis should be directed at the increased cost of goods sold and the high debt level.
					2018	2019
				$	22937696	20979000
High level debt i.e high level interest rate					1.40%	3.23%