Sweet Tooth Co. (STC) is a privately owned manufacturer and distributor of packaged baked goods. Its products include individually packaged snack cakes, brownies, cookies, and donuts, and are sold in grocery, convenience, and discount stores throughout Canada.

It is February 1, 2021, and the board of directors is meeting to discuss STC's financial performance. STC has incurred losses for the years ended December 31, 2019, and 2020, and the board is concerned that STC will not be able to make its next long-term debt payment, due on March 1, 2021, due to a cash shortage.

The board has hired a consulting firm, Shapiro & Atkins LLP (S&A), to assist in the evaluation of STC's performance and operations. You, CPA, work for S&A and have been assigned to work on the engagement.

The board has provided you with STC's draft financial statements for the year ended December 31, 2020 (Appendix I). The financial statements were prepared by the assistant controller, who joined STC in October 2020, because both the chief financial officer and the controller resigned unexpectedly in December 2020. Jonathan Tang, the chief executive officer, admits that he is focused on operations and prefers to "leave the numbers to the accountants to manage."

The board also provided you information on STC's operations (Appendix II).

Task #1

The board would like you to start by performing a horizontal and vertical trend analysis on STC's income statement, including an interpretation and explanation of the key trends that you identify.

Income statement for the period ending December 31: 2020 2019 (unaudited) (audited) Revenue $48,412,412 $50,132,581 Cost of sales 40,839,210 40,858,054 Gross margin 7,573,202 9,274,527 Salaries and benets 3,595,945 3,900,921 Management bonus 1,000,000 1 ,000,000 Advertising 1 ,364,427 2,654,675 Insurance and property taxes 170,890 180,100 Repairs and maintenance 210,810 470,333 Interest 517,500 652,500 Amortization 621 ,090 688,974 Other 200,400 210,233 Income before taxes (107,860) (483,209) Income taxes (25,887) (86,978) Net income (81 ,973) (396,231)