Principles of Managerial Finance

CHAPTER 2 Financial Statements and Analysis 85

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2–16 Common-size statement analysis A common-size income statement for Creek

Enterprises’ 2002 operations follows. Using the firm’s 2003 income statement

presented in Problem 2–15, develop the 2003 common-size income statement

and compare it to the 2002 statement. Which areas require further analysis and

investigation?

2–17 The relationship between financial leverage and profitability Pelican Paper,

Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers.

Some financial statement values for each company follow. Use them in a ratio

analysis that compares their financial leverage and profitability.

Item Pelican Paper, Inc. Timberland Forest, Inc.

Total assets $10,000,000 $10,000,000

Total equity (all common) 9,000,000 5,000,000

Total debt 1,000,000 5,000,000

Annual interest 100,000 500,000

Total sales $25,000,000 $25,000,000

EBIT 6,250,000 6,250,000

Net income 3,690,000 3,450,000

Creek Enterprises

Common-size Income Statement

for the Year Ended December 31, 2002

Sales revenue ($35,000,000) 100.0%

Less: Cost of goods sold  (^6)  (^5) . (^9) 
Gross profits 34.1%
Less: Operating expenses
Selling expense 12.7%
General and administrative expenses 6.3
Lease expense 0.6
Depreciation expense  (^3) . (^6) 
Total operating expense  (^2)  (^3) . (^2) 
Operating profits 10.9%
Less: Interest expense  (^1) . (^5) 
Net profits before taxes 9.4%
Less: Taxes (rate40%)  (^3) . (^8) 
Net profits after taxes 5.6%
Less: Preferred stock dividends  (^0) . (^1) 
Earnings available for common stockholders

5

.

5

%
Industry averages
Debt ratio 0.51
Times interest earned ratio 7.30
Fixed-payment coverage ratio 1.85