Creek Enterprises Income Statement for the Year Ended December 31, 2022 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 21%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders $30,000,000 21,000,000 $ 9,000,000 $3,000,000 1,800,000 200,000 1,000,000 $3,000,000 1,000,000 $ 2,000,000 420,000 $ 1,580,000 100,000 $1,480,000

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Common-size statement analysis A common-size income statement for Creek Enterprises’ 2021 operations follows. Using the firm’s 2022 income statement, develop the 2022 common-size income statement and compare it with the 2021 common-size statement. Which areas require further analysis and investigation?

### Creek Enterprises Income Statement
### For the Year Ended December 31, 2022

#### Revenue and Expenses Breakdown:

- **Sales revenue**: $30,000,000
- **Less: Cost of goods sold**: $21,000,000
  - **Gross profits**: $9,000,000
  
#### Operating Expenses:

- **Selling expense**: $3,000,000
- **General and administrative expenses**: $1,800,000
- **Lease expense**: $200,000
- **Depreciation expense**: $1,000,000
  - **Total Operating expenses**: $6,000,000
  
  - **Operating profits**: $3,000,000

#### Interest and Taxes:

- **Less: Interest expense**: $1,000,000
  - **Net profits before taxes**: $2,000,000
- **Less: Taxes (rate = 21%)**: $420,000
  - **Net profits after taxes**: $1,580,000

#### Dividends:

- **Less: Preferred stock dividends**: $100,000
  - **Earnings available for common stockholders**: $1,480,000

---

### Explanation of Components:

- **Sales revenue** represents the total income from sales before any expenses are deducted.
- **Cost of goods sold (COGS)** is the direct costs attributable to the production of the goods sold.
- **Gross profits** is calculated as sales revenue minus cost of goods sold.
- **Operating expenses** include all the costs associated with running the business aside from the cost of goods sold, including Selling expense, General and administrative expenses, Lease expense, and Depreciation expense.
- **Operating profits** is the profit earned from a firm's normal core business operations.
- **Interest expense** is the cost incurred by an entity for borrowed funds.
- **Net profits before taxes** is the amount of profit before any tax has been deducted.
- **Taxes** are calculated at a rate of 21%.
- **Net profits after taxes** is the profit remaining after all operating expenses, interest, and taxes have been deducted.
- **Preferred stock dividends** are the dividends that are paid out to preferred stockholders.
- **Earnings available for common stockholders** is the profit left after all expenses, taxes, and preferred dividends have been paid
Transcribed Image Text:### Creek Enterprises Income Statement ### For the Year Ended December 31, 2022 #### Revenue and Expenses Breakdown: - **Sales revenue**: $30,000,000 - **Less: Cost of goods sold**: $21,000,000 - **Gross profits**: $9,000,000 #### Operating Expenses: - **Selling expense**: $3,000,000 - **General and administrative expenses**: $1,800,000 - **Lease expense**: $200,000 - **Depreciation expense**: $1,000,000 - **Total Operating expenses**: $6,000,000 - **Operating profits**: $3,000,000 #### Interest and Taxes: - **Less: Interest expense**: $1,000,000 - **Net profits before taxes**: $2,000,000 - **Less: Taxes (rate = 21%)**: $420,000 - **Net profits after taxes**: $1,580,000 #### Dividends: - **Less: Preferred stock dividends**: $100,000 - **Earnings available for common stockholders**: $1,480,000 --- ### Explanation of Components: - **Sales revenue** represents the total income from sales before any expenses are deducted. - **Cost of goods sold (COGS)** is the direct costs attributable to the production of the goods sold. - **Gross profits** is calculated as sales revenue minus cost of goods sold. - **Operating expenses** include all the costs associated with running the business aside from the cost of goods sold, including Selling expense, General and administrative expenses, Lease expense, and Depreciation expense. - **Operating profits** is the profit earned from a firm's normal core business operations. - **Interest expense** is the cost incurred by an entity for borrowed funds. - **Net profits before taxes** is the amount of profit before any tax has been deducted. - **Taxes** are calculated at a rate of 21%. - **Net profits after taxes** is the profit remaining after all operating expenses, interest, and taxes have been deducted. - **Preferred stock dividends** are the dividends that are paid out to preferred stockholders. - **Earnings available for common stockholders** is the profit left after all expenses, taxes, and preferred dividends have been paid
### Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2021

#### Income Statement Breakdown

**Sales Revenue ($35,000,000):** 100.0%

**Less: Cost of Goods Sold (COGS):** 65.9%
- This represents the direct costs attributable to the production of the goods sold by Creek Enterprises.

**Gross Profits:** 34.1%
- Gross profit is calculated by subtracting the cost of goods sold from the sales revenue.

**Less: Operating Expenses:**
- **Selling Expense:** 12.7%
  - Costs associated with the sales process, such as advertising and sales commissions.
- **General and Administrative Expenses:** 6.3%
  - Overhead costs not tied to production, including salaries for administrative staff, utilities, and office supplies.
- **Lease Expense:** 0.6%
  - Costs for leasing property or equipment.
- **Depreciation Expense:** 3.6%
  - Allocated cost of tangible fixed assets over their useful lives.

**Total Operating Expense:** 23.2%
- Sum of all operating expenses.

**Operating Profits:** 10.9%
- Calculated by subtracting total operating expenses from gross profits. Also known as operating income or EBIT (Earnings Before Interest and Taxes).

**Less: Interest Expense:** 1.5%
- Cost incurred by the entity for borrowed funds.

**Net Profits Before Taxes:** 9.4%
- Profits remaining after deducting interest expense from operating profits.

**Less: Taxes (rate = 21%):** 2.0%
- Tax expense calculated at a rate of 21% on net profits before taxes.

**Net Profits After Taxes:** 7.4%
- Profits remaining after deducting the tax expense.

**Less: Preferred Stock Dividends:** 0.1%
- Dividends that must be paid to preferred shareholders before any earnings are available for common stockholders.

**Earnings Available for Common Stockholders:** 7.3%
- Net profits after taxes minus preferred stock dividends, representing the earnings available to common shareholders.

#### Detailed Analysis
The provided common-size income statement allows for easy comparison across periods and with other companies by expressing each line item as a percentage of total sales revenue. This format facilitates trend analysis and operational efficiency assessment.

Understanding these components is crucial for stakeholders, including students of finance and business,
Transcribed Image Text:### Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2021 #### Income Statement Breakdown **Sales Revenue ($35,000,000):** 100.0% **Less: Cost of Goods Sold (COGS):** 65.9% - This represents the direct costs attributable to the production of the goods sold by Creek Enterprises. **Gross Profits:** 34.1% - Gross profit is calculated by subtracting the cost of goods sold from the sales revenue. **Less: Operating Expenses:** - **Selling Expense:** 12.7% - Costs associated with the sales process, such as advertising and sales commissions. - **General and Administrative Expenses:** 6.3% - Overhead costs not tied to production, including salaries for administrative staff, utilities, and office supplies. - **Lease Expense:** 0.6% - Costs for leasing property or equipment. - **Depreciation Expense:** 3.6% - Allocated cost of tangible fixed assets over their useful lives. **Total Operating Expense:** 23.2% - Sum of all operating expenses. **Operating Profits:** 10.9% - Calculated by subtracting total operating expenses from gross profits. Also known as operating income or EBIT (Earnings Before Interest and Taxes). **Less: Interest Expense:** 1.5% - Cost incurred by the entity for borrowed funds. **Net Profits Before Taxes:** 9.4% - Profits remaining after deducting interest expense from operating profits. **Less: Taxes (rate = 21%):** 2.0% - Tax expense calculated at a rate of 21% on net profits before taxes. **Net Profits After Taxes:** 7.4% - Profits remaining after deducting the tax expense. **Less: Preferred Stock Dividends:** 0.1% - Dividends that must be paid to preferred shareholders before any earnings are available for common stockholders. **Earnings Available for Common Stockholders:** 7.3% - Net profits after taxes minus preferred stock dividends, representing the earnings available to common shareholders. #### Detailed Analysis The provided common-size income statement allows for easy comparison across periods and with other companies by expressing each line item as a percentage of total sales revenue. This format facilitates trend analysis and operational efficiency assessment. Understanding these components is crucial for stakeholders, including students of finance and business,
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