Analysis of financial statement using horizontal analysis.
Common-size statement analysis
A common-size income statement for Creek Enterprises' 2005 operations follows. Using the firm's 2006 income statement presented in Problem 2-12, develop the 2006 common-size income statement and compare it to the 2005 statement. Which areas require further analysis and investigation?
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Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2005
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Sales revenue ($35,000,000)
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100.0%
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Less: Cost of goods sold
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65.9
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Gross profits
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34.1%
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Less: Operating expenses
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Selling expense
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12.7%
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General and administrative expenses
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6.3
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Lease expense
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0.6
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Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2005
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Depreciation expense
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3.6
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Total operating expense
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23.2
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Operating profits
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10.9%
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Less: Interest expense
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1.5
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Net profits before taxes
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9.4%
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Less: Taxes (rate = 40%)
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3.8
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Net profits after taxes
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5.6%
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Less: Preferred stock dividends
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0.1
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Earnings available for common stockholders
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5.5%
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