
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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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?

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

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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