Activity 25 Purpose: ANALYSIS: COMMON-SIZE STATEMENTS Prepare common-size statements and understand the information provided The COMMON-SIZE INCOME STATEMENT compares all amounts to revenues. The analysis measures each item as a percentage of revenue. Q1 For Gateway and Hewlett Packard companies listed below, complete the common-size statements by dividing each item on the income statement by sales revenue. Record the resulting common-size percentage in the shaded area provided. ($ in millions) Hewlett Packard (HPO) 10/31/2005 Fiscal year ended.(fye)... Sales revenue Gateway (GTW) DELL (DELL) 12/31/2005 2/3/2006 Amount CS% Amount CS% Amount CS% Cost of goods sold (COGS) Gross profit Selling, genl, adm expense (SGA) Research and development (R&D). $3,854 3,532 $55.908 to $86.096 45.958 072 66,224 322 9.950 S 20.472 321 M 5.140 2 13.293 0 463 COR 3.490 Income from operations 1 4.347 76 3.689 Other revenues and expenses. 5 227 04 (146) Income from cont oper B4 tax 6 4,574 3,543 Provision for income tax 0 1.002 18% 1.145 Income from cont operations 6 3.572 64% 2,398 Nonrecurring items 0 0 0.0% 0 Net Income $ 6 $3,572 84% $2,398 Refer to the series of income statements and the common-size analysis above to answer the following questions. Q2 The greatest amount of sales revenue was reported by (GTW/DELL/HPQ), but the greatest net income was reported by (GTW/DELL/HPQ). Q3 The company that reported the highest ratio for... a. Gross profit margin (GTW/DELL/HPQ) b. C. Income from operations as a percentage of sales ROS (GTW/DELL/HPQ) (GTW/DELL/HPQ) d. A (higher/lower) profitability ratio is preferred. Q4 The company that reported the greatest percentage of expense for... COGS (GTW/DELL/HPQ), which is considered (favorable / unfavorable). Why? a. b. SGA c. R&D (GTW/DELL/HPQ), which is considered (favorable / unfavorable). Why? (GTW/DELL/HPQ), which is considered (favorable/unfavorable). Why? Q5 During 2005, (GTW/DELL/HPQ) remained the #1 direct-sale computer vendor. (Hint: Refer to company descriptions in Appendix A - Featured Corporations) Interpreting and Analyzing Financial Statements 4e Page 40 Chapter 3 Income Statement