Interpreting common-size income statements. Exhibit 3.28 presents common-size income statements for The GAP and The Limited, two apparel retailing firms, for three recent years. In addition to the cost of merchandise sold, both firms include occupancy expense for their stores (rent, utilities, depreciation) in cost of goods sold. The GAP tends to rely on print advertising to create demand, whereas The Limited relies more heavily on in-store promotions ( 2 for 1 discounts and special daily price reductions). The GAP recently expanded into other countries, whereas The Limited operates almost exclusively in the United States.

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 why the cost of goods sold to sales percentages for The GAP are less than that for The Limited.

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

d. Suggest possible reasons why the selling and administrative expenses to sales percentages for The Limited are less than that for The GAP.

e. Suggest possible reasons for the different pattern of changes in the interest expense to sales percentages for the two firms during the three-year period.

f. Suggest possible reasons for the increasing income tax expense to sales percentages for the two firms during the three-year period.

g. Are the profit margin percentages of The GAP or those of The Limited closer to the level you would expect for a specialty apparel retailer? Explain your reasoning. You may wish to refer to the data for the five firms in Exhibit 3.12 in responding to this question.