Interpreting common-size income statements Lyle's Lemonade Company (Lyle's Lemonade) and CitraPop together have a large share of the nonalcoholic beverage market in the United States. Most beverage manufacturing involves adding water to a preciously prepared syrup. This mixing process usually occurs at the stage just prior to bottling the beverage. Lyle's Lemonade relies on independent companies to conduct the mixing, bottling, and distribution operations, with Lyle's Lemonade selling the syrup to the bottlers. CitraPop relies more heavily on owning its bottlers and thereby remains involved in both manufacturing and distribution. Exhibit 4.8 presents common-size income statements for Lyle's Lemonade and CitraPop for three recent years. Both companies apply U.S. GAAP

a. Suggest possible reasons for the decreasing cost of goods sold to sales percentages for the two firms during the three-year period.

b. Suggest possible reasons for the increasing selling and administrative expenses to sales percentages for the two firms for the three-year period.

c. Suggest possible reasons for the decreasing interest expense top sales percentages for both firms.

d. Lyle's Lemonade's income tax expense to sales percentages are larger than those for CitraPop, suggesting that Lyle's Lemonade has a higher income tax burden. For a different perspective, compute the ratio of income tax expense to net income before income taxes for each firm. For example, this percentage for Lyle's Lemonade for 2006 is 35.8% [= 10.0% / (17.9% + 10.0%)]. What insight does this measure provide regarding the income tax burden of Lyle's Lemonade versusCitraPop?

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Lyle's Lemonade Company and CitraPop Common-Size Income Statements (Problem 30) EXHIBIT 4.8 Lyle's Lemonade Company CitraPop 2006 2008 2007 2006 2008 2007 Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Other Revenues 1.3 1.2 3.3 0.9 0.9 0.8 (34.4) (35.7) (45.8) (45.8) Cost of Goods Sold (36.3) (45.7) Selling and Administrative Expenses .. Interest Expense Income Tax Expense (35.8) (1.0) (7.8) (34.5) (35.0) (34.7) (35.5) (36.3) (1.6) (9.6) (2.6) (0.7) (0.9) (1.2) (5.6) (10.0) (6.5) (6.4) Net Income 22.7% 11.9% 20,3% 17.9% 13.8% 12.4% Sales Growth 8.2% 6.5% 1.8% 6.8% 5.3% 22.7%