Question 1

Data for the most recent four fiscal years of Consistent Company are given below:
20X6 20X5 20X4 20X3
Net sales $78,000 $75,000 $67,000 $60,000
Cost of goods sold 33,000 32,000 30,000 26,000
Gross profit 45,000 43,000 37,000 34,000
Operating
expenses
25,000 22,000 19,000 14,000
Net income 20,000 21,000 18,000 20,000
a) Prepare an analysis showing the trend percentages for the four-year period using 20X3 as the base year.
20X6 20X5 20X4 20X3
Net sales 130% 125% 112% 100%
Cost of goods sold 127% 123% 115% 100%
Gross profit 132% 126% 109% 100%
Operating
expenses
179% 157% 136% 100%
Net income 100% 105% 90% 100%
b) What do the trend percentages indicate regarding Consistent Company's income statement data?
COGS increasing at a faster rate than sales, company needs to control cost of production.
Operating expenses is increasing at a disporportionately fast rate, needs to be controlled as even though sales is plauteuing Operating expenses is not
20X3 20X4 20X5 20X6
Net sales $60,000 $67,000 $75,000 $78,000
$50,000
$60,000
$70,000
$80,000
$90,000
Cost of goods sold 26,000 30,000 32,000 33,000
Gross profit 34,000 37,000 43,000 45,000
Operating
expenses
14,000 19,000 22,000 25,000
Net income 20,000 18,000 21,000 20,000
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
a) Prepare an analysis showing the trend percentages for the four-year period using 20X3 as the base year.
b) What do the trend percentages indicate regarding Consistent Company's income statement data?
Operating expenses is increasing at a disporportionately fast rate, needs to be controlled as even though sales is plauteuing Operating expenses is not
$50,000
$60,000
$70,000
$80,000
$90,000
This chart is wrong, do one with percentages

Net sales
Cost of goods sold
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
20X3 20X4 20X5 20X6
Cost of goods sold
Gross profit
Operating expenses
Net income
Question 2
A common size income statement for Creek Enterprises' 2013 operations follows.
Common size Income Statement
Creek Enterprises for the year ended December 31, 2013
Sales revenue ($35,000,000)
Less: Cost of goods sold
Gross profits
Less: Operating expenses
Selling expense 12.70%
General and administrative expenses 6.3
Lease expense 0.6
Depreciation expense 3.6
Total operating expense
Operating profits
Less: Interest expense
Net profits before taxes
Less: Taxes (rate 40%)
Net profits after taxes
Common size Income Statement
Creek Enterprises for the year ended December 31, 2014
Sales revenue
Less: Cost of goods sold
Gross profits
Less: 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 expense
Operating profits
Less: Interest expense
Net profits before taxes
Less: Taxes (rate 40%)
Net profits after taxes
a) Using the firm's 2014 income statement presented below, develop the 2014 common size income statement.
Sales revenue
Less: Cost of goods sold
Gross profits
Less: 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 expense
Operating profits
Less: Interest expense
Net profits before taxes
Less: Taxes (rate 40%)
Net profits after taxes
a) Compare and comment on the common size statements for the two years. Which areas require further analysis and investigation?
Sales revenue
100.00%
Less: Cost of goods sold
70.00%
Gross profits
30.00%
Less: Operating expenses
Selling expense
10.00%
General and administrative expenses
6.00%
Lease expense
0.67%
Depreciation expense
3.33%
Total operating expense
20.00%
Operating profits
10.00%
Less: Interest expense
3.33%
Net profits before taxes
6.67%
Less: Taxes (rate 40%)
2.67%
Net profits after taxes
4.00%
100%
65.9
34.10%
23.2
10.90%
1.5
9.40%
3.8
5.60%
$30,000,000
21,000,000
$9,000,000
6,000,000
$3,000,000
1,000,000
$2,000,000
800,000
$1,200,000
a) Using the firm's 2014 income statement presented below, develop the 2014 common size income statement.
2014 2013 Profit reduced by 4%, selling expenses need to be proportionately reduced by 4% as well
$30,000,000 100.00%
100.00% Selling expenses need to be controlled. (only 2.7% dropped not 4%)
21,000,000 70.00%
65.90%
$9,000,000 30.00%
34.10%
10.00%
12.70% Loans to be serviced in 2014
6.00%
6.30% interest expense shld be proportionate??
0.67%
60.00%
3.33%
3.60%
6,000,000 20.00%
23.20% COGS
$3,000,000 10.00%
10.90% Sales dropped by 5m, but COGs rose by 4.1%. Cogs spending need to be controlled.
1,000,000 3.33%
1.50% Cogs should be proportionate or lower than previous year to be in a better financial position.
$2,000,000 6.67%
9.40%
800,000 2.67%
3.80%
$1,200,000 4.00%
5.60%
a) Compare and comment on the common size statements for the two years. Which areas require further analysis and investigation?
100.00%
65.90%
34.10%
12.70%
6.30%
60.00%
3.60%
23.20%
10.90%
150.00%
9.40%
3.80%
5.60%
Profit reduced by 4%, selling expenses need to be proportionately reduced by 4% as well
Selling expenses need to be controlled. (only 2.7% dropped not 4%)
This is a trickier thing to analyse, need to do it in totality. Weak on its own.
525000 2013 expenses for 2014 expenses to be 1.5% the value needs to be
1,000,000 2014 expenses 450000
Sales dropped by 5m, but COGs rose by 4.1%. Cogs spending need to be controlled.
Cogs should be proportionate or lower than previous year to be in a better financial position.
Teacher say Just STATE this change, because it is too superficial to analyse financial expense alone.
Only elaborate further if you have more details from the company.
A basic answer could be
Rose to 3.3%, could it be that they had more loans borrowed this year?
Teacher say Just STATE this change, because it is too superficial to analyse financial expense alone.
Question 3
a) Prepare a vertical analysis for Risk Corporation's balance sheet to determine the component percentages of its assets, liabilities, and stockholders' equity.
ASSETS
Total current assets $80,000
19.05%
Long-term
investments
40,000
9.52%
Property, plant, and
equipment, net
300,000
71.43%
Total assets 420,000
100.00%
LIABILITIES
Total current
liabilities
$65,000
15.48%
Long-term debt 120,000
28.57%
Total liabilities 185,000
44.05%

SHAREHOLDERS'
EQUITY
Total shareholders'
equity
$235,000
55.95%
Total liabilities and
shareholders' equity
$420,000
100.00%
b) What item forms the greatest component of the total assets and the total liabilities?
Assets: Property and Plant
Liabilities: Long term Liabilities
Risk Corporation
Statement of financial position as at
December 31, 2010
c) Are the assets of the company mainly financed by the owners or outsiders?
Owners, majoirity of the assets are plant assets
a) Prepare a vertical analysis for Risk Corporation's balance sheet to determine the component percentages of its assets, liabilities, and stockholders' equity.
b) What item forms the greatest component of the total assets and the total liabilities?