Question

133 CHAPTER 3 Financial Statements and Ratio Analysis Common-size statement analysis A common-size income statement for Creek Enterprises' 2018 operations follows. Using the firm's 2019 income statem presented in Problem 3-16, develop the 2019 common-size income statement an compare it with the 2018 statement. Which areas require further analysis and investigation? P3-19 Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2018 Sales revenue ($35,000,000) Less: Cost of goods sold 100.0% 65.9 34.1% Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense 12.7% 6.3 0.6 Total operating expense Operating profits 23.2% 10.9% Less: Interest expense Less: Taxes (rate-21 %) Less: Preferred stock dividends 1.5 9.4% 2.0 7.4% 0.1 7.3% Net profits before taxes Net profits after taxes Earnings available for common stockholders The relationship between financial leverage and profitability Pelican Paper Inc. and Timberland Forest Inc. are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that com- pares the firms' financial leverage and profitability. P3-20 ab Item Pelican Paper Timberland Forest

Answer 1

Common-Size Income Statement:

Supporting calculations:

Comparison with 2018 details.

Compare to 2018, the cost of goods sold is increased, due to this, gross margin is decreased from 34.1% to 30%. The percentage of operating expenses is decreased from 23.2% to 20% in 2019. On the other side, the share of taxes are decreased from 2% to 1.40% in 2019. Overall net profit after taxes is decreased from 7.4% to 5.27%. This is also due to decrease in sales revenue from $35,000,000 to $30,000,000 in 2019. Overall, the earnings available to the common stockholders is decreased from 7.3% to 4.63% in 2019.

Sales revenue need to be investigated further for "why is has decreased from $35,000,000 to $30,000,000 because this is the main reason for decrease of profits from 2018 to 2019.