Solution
Shakeel answered on
Jan 24 2021
P3-19
P3–19 Common-size statement analysis A common-size income statement for Creek Enterprises’ 2018 operations follows. Using the firm’s 2019 income statement presented in Problem 3–16, develop the 2019 common-size income statement and compare it with the 2018 statement. Which areas require further analysis and investigation?
P3-16 Chart
Creek Enterprises Common-Size Income Statement for the Year Ended December 31, 2018 Creek Enterprises Income Statement for the Year Ended December 31, 2019
Sales revenue ($35,000,000) 100.00% Sales revenue $30,000,000
Less: Cost of goods sold 65.9 Less: Cost of goods sold 21,000,000
Gross profits 34.1% Gross profits $ 9,000,000
Less: Operating expenses Less: Operating expenses
Selling expense 12.7% Selling expense $ 3,000,000
General and administrative expenses 6.3 General and administrative expenses 1,800,000
Lease expense 0.6 Lease expense 200,000
Depreciation expense 3.6 Depreciation expense 1,000,000
Total operating expense 23.2% Total operating expense $ 6,000,000
Operating profits 10.9% Operating profits $ 3,000,000
Less: Interest expense 1.5 Less: Interest expense 1,000,000
Net profits before taxes 9.4% Net profits before taxes $ 2,000,000
Less: Taxes (rate=21%rate=21%) 2.0 Less: Taxes (rate=21%rate=21%) 420,000
Net profits after taxes 7.4% Net profits after taxes $1,580,000
Less: Prefe
ed stock dividends 0.1 Less: Prefe
ed stock dividends 100,000
Earnings available for common stockholders 7.3% Earnings available for common stockholders $ 1,480,000
ANSWER
2018 2019
% AMOUNT % AMOUNT DIFFERENCE
Sales Revenue 100.00% $35,000,000.00 100.00% 30,000,000 0.00%
Less: Cost of goods sold 65.90% $23,065,000.00 70.00% 21,000,000 -4.10%
Gross Profit 34.10% $11,935,000.00 30.00% 9,000,000 4.10%
Less: Operating Expenses
Selling Expenses 12.70% $4,445,000.00 10.00% 3,000,000 2.70%
General and Administrative expenses 6.30% $2,205,000.00 6.00% 1,800,000 0.30%
Lease expense 0.60% $210,000.00 0.67% 200,000 -0.07%
Depreciation expense 3.60% $1,260,000.00 3.33% 1,000,000 0.27%
Total operation expenses 23.20% $8,120,000.00 20.00% 6,000,000 3.20%
Operating profits 10.90% $3,815,000.00 10.00% 3,000,000 0.90%
Less: Interest expenses 1.50% $525,000.00 3.33% 1,000,000 -1.83%
Net profit before tax 9.40% $3,290,000.00 6.67% 2,000,000 2.73%
Less: Taxes(rate = 21%) 2.00% $700,000.00 1.40% 420,000 0.60%
Net profit after tax 7.40% $2,590,000.00 5.27% 1,580,000 2.13%
Less: Prefe
ed stock dividend 0.10% $35,000.00 0.33% 100,000 -0.23%
Earnings available to common shareholders 7.30% $2,555,000.00 4.93% 1,480,000 2.37%
Areas requiring analysis and investigation
1. Cost of goods has increased by 4% whereas sales has decreased compared to last yea
2. Interest expense has increased even though expenses has decreased.
P4-20
P4–20 Integrative: Pro forma statements Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans. The following financial data are also available:
1. The firm has estimated that its sales for 2020 will be $900,000.
2. The firm expects to pay $35,000 in cash dividends in 2020.
3. The firm wishes to maintain a minimum cash balance of $30,000.
4. Accounts receivable represent approximately 18% of annual sales.
5. The firm’s ending inventory will change directly with changes in sales in 2020.
6. A new machine costing $42,000 will be purchased in 2020. Total depreciation for 2020 will be $17,000.
7. Accounts payable will change directly in response to changes in sales in 2020.
8. Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.
9. Marketable securities, other cu
ent liabilities, long-term debt, and common stock will remain unchanged.
a. Prepare a pro forma income statement for the year ended December 31, 2020, using the percent-of-sales method.
b. Prepare a pro forma balance sheet dated December 31, 2020, using the judgmental approach.
c. Analyze these statements, and discuss the resulting external financing required
Red Queen Restaurants Income Statement for the Year Ended December 31, 2019 Red Queen Restaurants Balance Sheet December 31, 2019
Sales revenue $800,000 Assets Liabilities and stockholders’ equity
Less: Cost of goods sold 600,000 Cash $32,000 Accounts payable $100,000
Gross profits $200,000 Marketable securities 18,000 Taxes payable 20,000
Less: Operating expenses 100,000 Accounts receivable 150,000 Other cu
ent liabilities 5,000
Net profits before taxes $100,000 Inventories 100,000 Total cu
ent liabilities $125,000
Less: Taxes (rate = 21%) 21,000 Total cu
ent assets $300,000 Long-term debt 200,000
Net profits after taxes $79,000 Net fixed assets 350,000 Total liabilities $325,000
Less: Cash dividends 20,000 Total assets $650,000 Common stock 150,000
To retained earnings $59,000 Retained earnings 175,000
Total liabilities and stockholders’ equity $650,000
PUT IN FORMULA
Red Queen Restaurants Income Statement for the Year Ended December 31, 2019 % SALES Red Queen Restaurants Income Statement for the Year Ended December 31, 2019
Sales revenue $800,000 Sales revenue $900,000
Less: Cost of goods sold 600,000 75% Less: Cost of goods sold $675,000 75%
Gross profits $200,000 25% Gross profits $225,000 25%
Less: Operating expenses 100,000 13% Less: Operating expenses $112,500.00 12.50%
Net profits before taxes $100,000 13% Net profits before taxes $112,500.00 12.50%
Less: Taxes (rate = 21%) 21,000 3% Less: Taxes (rate = 21%) $23,625.00
Net profits after taxes $79,000 10% Net profits after taxes $88,875.00
Less: Cash dividends 20,000 3% Less: Cash dividends $35,000.00
To retained earnings $59,000 7% To retained earnings $53,875.00
Assets Liabilities and Stockholders' equity
Cash $49781 Accounts payable $112,500.0
Marketable securities $18,000 Taxes payable $5,906
Accounts receivable $162,000.00 Other cu
ent liabilities $5,000
Inventories $112,500.00 External Finance $15,000
Total cu
ent assets $342,281.00 Total...