Written Assignment 2 - P3-20 Common-size statement analysis...

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P3-20Common-size statement analysisA common-size income statement for Creek Enterprises' 2014operation follows. Using the firm's 2015 income statementpresented in Problem 3-18, develop the 2015 common-sizeincome statement and compare it with the 2014 statement.Which areas require further analysis and investigation?2015 Income statement presented in Problem 3-18:Creek Enterprises Income Statement for the year Ended December 31, 2015Sales revenue$30,000,000 Less: Cost of goods sold21,000,000Gross Profits$9,000,000 Less: Operating expensesSelling expense$3,000,000 General and administrative expenses1,800,000Lease expense200,000Depreciation expense1,000,000Total operating expense$6,000,000 Operating profit$3,000,000 Less: Interest expense1,000,000Net profit before taxes$2,000,000 Less: Taxes (rate = 40%)800,000Net profit after taxes1,200,000Less: Prefered stock dividends100,000Earnings avaiable for common stockholders$1,100,000 Creek Enterprises Common-Size Income Statementfor the Year Ended Dezember 31, 2014Sales revenue ($35,000,000)100%Less: Cost of goods sold65.9Gross profits34.10%Less Operating expensesSelling Expenses12.70%General and administrative expenses6.3Lease expense0.6Depreciation expense3.6Total operating expense23.2Operating profits10.90%Less: Interest expense1.5Net profits before taxes9.40%Less: Taxes (rate = 40%)3.8Net profit after taxes5.60%Less :prefered stock dividends0.1Earnings available for common stockholders5.50%ANSWER
Creek Enterprises Common-Size Income Statementfor the Year Ended December 31, 2015Sales revenue ($30,000,000)100%$30,000,000 Less: Cost of goods sold70$21,000,000 Gross profits30.00%$9,000,000 Less Operating expensesSelling Expenses10.00%$3,000,000 General and administrative expenses6$1,800,000 Lease expense0.67$200,000 Depreciation expense3.33$1,000,000 Total operating expense20$6,000,000 Operating profits10.00%$3,000,000 Less: Interest expense3.33$1,000,000 Net profits before taxes6.67%$2,000,000 Less: Taxes (rate = 40%)2.67$800,000 Net profit after taxes4.00%$1,200,000 Less :prefered stock dividends0.33$100,000 Earnings available for common stockholders3.67%$1,100,000 There are several issues that Creek Enterprises should investigate and analyze. First is the decline in sales revenue. Is there greater competition, are the goods outdated, is there an internal production problem, etc.? A closer look is required to look at the cost of goods sold, as they have increased from 65.9% in 2014 to 70% in 2015. The decrease of the operating expenses, though favorable in most circumstances, might be also associated with the decrease in sales. It might be advisable to analyze whether the decrease is associated with cost savings implemented or because of reduced cost is due to the decreased sales. Interest expenses in 2015 have increased to 3.33% compared to 1.5% in 2014. Most likely cause is that Creek Enterprises increased its debt level during the 2015 operating year. Creek Enterprises needs to investigate cause and reason for the increase in debt.

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