I\'m having trouble with question 20P of Chapter 3 in Principals of Managerial F

Question

I'm having trouble with question 20P of Chapter 3 in Principals of Managerial Finance, 14th edition. Can you please help me? Thank you

Common-size statement analysis A common-size income statement for Creek Enterprises’ 2014 operations follows. Using the firm’s 2015 income statement presented in Problem 3–18, develop the 2015 common-size income statement and compare it with the 2014 statement. Which areas require further analysis and investigation?

Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2014

Sales revenue ($35,000,000) 100.0%
Less: Cost of goods sold 65.9
Gross profits 34.1%
Less: Operating expenses
Selling expense 12.7%
General and administrative expenses 6.3
Lease expense 0.6
Depreciation expense 3.6
Total operating expense 23.2
Operating profits 10.9%
Less: Interest expense 1.5
Net profits before taxes 9.4%
Less: Taxes (rate 5 40%) 3.8
Net profits after taxes 5.6%
Less: Preferred stock dividends 0.1
Earnings available for common stockholders 5.5%

Explanation / Answer

Which areas require further analysis and investigation?

The areas which are marked WORSE.

Please note evaluation column is not part of common size statement. It is for your understanding about areas requiring furthur investigation

COMMON SIZE INCOME STATEMENT 2011 2012 Evaluation % % Sales 100.00 100.00 Same Less: Cost of Goods Sold 65.90 70.00 Worse Gross Profit 34.10 30.00 Worse Less: Operating Expenses Selling Expense 12.70 10.00 Better General & Administration Expenses 6.30 6.00 Better Lease Expense 0.60 0.67 Worse Depreciation 3.60 3.33 Better Total Operating Expense 23.20 20.00 Better Operating Profits 10.90 10.00 Better Less: Interest Expense 1.50 3.33 Worse Net Profit before Tax 9.40 6.67 Better Less: Tax 3.80 2.67 Better Net Profit after Tax 5.60 4.00 Better Less: Preferred Stock Dividends 0.10 0.33 Worse Earnings available for Common Stockholders 5.50 3.67 Better

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