Common size income statements express all income statement items as a percentage of:
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Common size income statements express all income statement items as a percentage of sales. Note that common size balance sheets express all balance sheet accounts as a percentage of total assets.
Matrix, Inc.’s common size income statement for the years ended December 31, 20X1 and 20X2 included the following information (percent of net sales):
|
20X1 |
20X2 | |
|
Sales |
100 |
100 |
|
Cost of Goods Sold |
(55) |
(60) |
|
Gross Profit |
45 |
40 |
|
Selling General & Administrative |
(5) |
(5) |
|
Depreciation |
(7) |
(8) |
|
Operating Profit (EBIT) |
33 |
37 |
|
Interest Expense |
(15) |
(7) |
|
Earnings before Taxes |
18 |
30 |
|
Income Tax Expense |
(6) |
(10) |
|
Earnings after Taxes |
12 |
20 |
Analysis of this data indicates that from 20X1 to 20X2:
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On a common size income statement, all amounts are stated as a percentage of net sales. Dollars of interest expense per dollar of sales has declined from 0.15 to 0.07. The other interpretations listed are not necessarily correct. The volume of sales is not shown on this common-size income statement. COGS increased as a percentage of sales, but if sales volume decreased, COGS may have decreased as well. The company's effective tax rate (income tax expense / pretax income) can be calculated from a common-size income statement. Here the effective tax rate was 33% in both years.
To study trends in a company’s cost of goods sold (COGS), an analyst should standardize COGS by dividing it by:
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In a common-size income statement, each income statement account is divided by sales. COGS is then production costs as a percentage of the sales price.
Comparing a company’s ratios with those of its competitors is best described as:
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Comparing a company’s ratios with those of its competitors is known as cross-sectional analysis.
How would the collection of accounts receivable most likely affect the current and cash ratios?
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Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do not change and the current ratio is unaffected. Because the numerator of the cash ratio only includes cash and marketable securities, collecting accounts receivable increases the cash ratio.
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