a common-size statement reports the same percentages that appear in a ________. This is a topic that many people are looking for. accountabilitynowpac.com is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, accountabilitynowpac.com would like to introduce to you Common size and trend analysis income statement CFA exam ch 5 p 2 . Following along are instructions in the video below:
“And welcome to the session in which we would look at two topics we re re going to look at common size income statement and we can look at trend and specifically we re going to be working with whole foods. The company that we ve been working with in this chapter and specifically we re going to be looking at those four years of competitive income statement. So what is a comment size and trend statement of net income well what s gonna happen we re gonna express all these figures into percentages and it s gonna help us compare the performance of the company within the same period. And it s gonna help us compare whole foods to wegmans giants and other stores similar to it now how do we perform this calculation so for example for the common size income statement.
We re going to assume sales forever so we re going to look at each year separately so common size would look at each year separately and what s gonna happen we re gonna look at sales as 100 so can i compare everything relative sales and we re going to take for example cost of goods sold as an item and we re gonna divide it by sales and find the percentage of cost of goods sold as of sales. Then we re gonna take direct store expense same thing divided by sales everything divided by sales. So everything is gonna be and 100 divided by sales and this says. The common size income statement for 2009 2010.
11 and 12. Now obviously we have several years we can see if there s any trend. We can see a trend. But what does it tell us well in.
2009 but we can see cost of goods sold was. 657. What does that mean it means for every dollar in sales. It cost whole food.
Sixty five point seven cent sixty five point seven cent well it means they kept the thirty four point three percent. So for every dollar. The cost is sixty five point seven cent. If we compare this to 2012 cost of goods sold was only sixty four point five.
Now as we can easily see that cost of goods sold as a percentage of sales went down now we can clearly see this if we look at the raw figures. If we look at the graph figures notice cost of goods sold went from five point two billion to seven point five billion. It went up but as a percentage of sales. It went down and this is excellent news.
This is excellent news for the company. Why because you re gonna take the savings of one point two percent and multiply. It by a large figure you re saving one point two percent of your cost of goods sold. Which is a large figure on your income statement.
Same thing we can do a direct store expense divided from twenty six point seven to twenty five point five. That s also any decrease of one point three percent also we saved we saved on our cost. Although the dollar amount might have went up let s go back to the income statement. The dollar amount went from two to point 1 billion to almost three billion.
But that s it doesn t matter as comparison to sales. We did a good job because percentage wise went down and this is what common size and trend analysis shows us it shows us on a dollar amount on a percentage amount what s happening to the company. What s that gonna tell us it s gonna tell us how well we are doing against the competitor. How we are how well we are doing against the industry or certain benchmark now we can compare ourselves rather than using another amount percentage basically percentage factor the size out it doesn t matter how large or how big your competitor you can compare yourself.
And see how well or not while you are doing and the most striking number is net income for 2009 versus net income in 2012. And we used to keep only close to two pennies or one point eight pennies for every dollar in sales in 2012. We were keeping for pennies. And that s basically we re keeping double the profit more than double the profit that we used to have in 2009.
So this is actually it s good news. But the point is try a common sized. Fact common size common size basically everyone has has has the same size so everything is comparable. All we can do what we call the trend analysis.
Trend analysis basically we ll gonna show the statements as a percentage of a base here so we re gonna look at a base here for example 2009 and we re gonna look at a trend. That s happening from the base here so we re assuming 2009 is the base year. So the first year is always the base here and everything is reported at 100 as of the base here which. Is 2009 now how did we come up with one.
121. 121. How do we calculate the. Trend.
Analysis and how did we get to one 258. What we do is we take the analysis here the analysis here is 2010 and we ll divide it by the base here. We ll take the analysis here divided by the base. Here.
We ll take the analysis here divided by the base here and we ll do the same thing for cost of goods sold the base. Here is 2009 and let s see what we see from the trend. Analysis. Well.
Let s look at sales first the top line and sales basically going up from year to year compared to 2009 and over from 2009 to 2012. Over looking over over this period sales basically went up almost forty eight forty five point eight forty five point seven percent that s good news. But we want to see what s happened to our to our cost of goods sold because that s important it s important to compare your growth in sales. But what s happened to your cost well your cost is going up.
But not on a faster scale. So actually you re doing pretty good. Because your cost is only going up by 43 and your sales going up by forty five point seven. And those two numbers are quite large so any any any effect.
It s gonna flow flow through the bottom line and indeed notice profit went up 317 percent over the years which is that s that s great that s that s really really great although sales. Only went up by 45 percent. But you were able to save on our cost of goods sold notice direct store expenses. Only went up by 39 percent while our sales gone up by 45.
So we re selling more then or we are keeping up with sales as we re opening stores. So the new stores are also generating sales in general and administrative expenses not not good because they re really moving faster than sales. But again we need to know what are those general administrative. Maybe maybe what paying large bonuses.
But something we need to keep an eye on because it s moving faster than sales pre opening expenses. It seems went down in 2010 went up then went up again. But compared to 2009. It s a lower cost.
It s it s it s not really growing as well as relocation store and relocation store closure in lease termination cost interest expense. It s not really that large of a number. But it s going down and you could look at investment and other expenses once again although they re going up. But it s positive because it s investment.
Another income that does not really a large number. But what what matter is is when you look at the trend analysis as we re looking for a trends. We re looking at something that s unusual and you want to look at the big percentages. But also we don t want to forget the dollar amount because notice here investment income went up 300.
But that s not really that important because it s not a large number but cost of goods sold went up by 43 purse 43 percent. But that s a large figure. But it s still much lower than the increase in sales so although we have percentages. But also you don t don t forget that that percentage will be applied to a dollar amount in the larger the dollar amount.
The larger is the effect now if it s a large large dollar amount and a large percentage. Obviously. It s gonna have a large effect and also the account itself as important cost of goods sold is very much important for whole food then the investments in stocks and bonds and other type of investments now clearly we can see the sales is increasing. But we have to be careful because companies could increase sales by opening new stores and we already know that whole food is opening new stores.
Because we do have a line that s called pre opening expenses so they re opening source. So the next thing you want to analyze is what s happening to their new stores. Because if this increase in sales is only due to opening new stores. Then that s not really good we want to see that truly sales is increasing.
So what do we have to do we have to examine how many stores they had open they had open over the years and what s happening to the trend of sales per store. Let s take a look at this starting with 2009. And this is from the annual report of whole foods. They started with 275 stores.
They end up with 284. The average number of stores opened during the year is two hundred and seventy nine point five. We assume that they opened the store throughout the the tote the total sales. The the total sales is a billion.
So the sales per store is twenty five million twenty five point eight million. So this is this is the 2007 2010. They had two hundred and eighty four opening when they started the year or a store open and upward almost three hundred to ninety nine the average number of stores opened during the year is to ninety one point one door sales is nine billion their sales per store is thirty thousand eight ninety five notice their sales per store is increasing and we can do the same thing for 2011 and 2012. So the average number of stores opened is more comparing 2009 to 2012.
Now we want to know what s happening to the actual sales because sales did go from eight billion to eleven point seven billion. So sales went up. But we want to know is it because we re opening new stores or is it because truly we are increasing our sales of let s find the difference between those two fingers to start our calculation to see what happened. So if we take eight million.
31 620 so basically we had an increase in sales. Of. 36 billion almost. 36.
37. Billion so the increase in sales between 2008. 2012 a 37. Billion.
Now your app. We need to know is it because we re opening new stores or are we really increasing sales well if we were not increasing sales. If so we need to connect and sell this figure to this figure. Because there s a difference of three point six seven billion dollars and increase in sales well if we were not increasing our sales and if we have three hundred and twenty three source of we take 323 323.
Source multiplied by the average sales for 2009. Okay. Our sales should have been nine point nine point three billion. Almost nine point three million nine point two eight one so if sales was exactly twenty eight million per store as 2009.
I were our our our sales should have only been nine point two billion. But our sales is eleven point six nine eight eleven point seven billion. That means sales grew actual sales growth is two point four billion and notice. If we add those two figures nine point two billion plus two point four billion.
It s gonna give us. It s gonna give us eleven point he left eleven point seven billion. So this is so this is the increase in sales. So notice this three point six seven billion.
Some of it is due just to lose store opening because we re opening new stores. And some of it is due to actual increase in sales. Okay so notice this three point six seven billion. This is because we keep selling twenty eight million per store and this is because we are increasing our sales per store.
So yes indeed sales is increasing. But we want to isolate those two because when we have retailers. It s very important to analyze what is their sales per store year over here because if you look at only adverse total sales. It could be very misleading because after opening new stores obviously sales will increase.
But we aren t to see what s happening to sales per store. And what s happening to the sales per store a year over a year is it going up is it coming down and here. We can see that yes they are in indeed they re increasing their sales because if they were not the income would have been nine point two billion as their sales were still twenty eight million per store. It seems.
It s increasing and that s all what i m going to cover in the comment size and the trend analysis the next thing we re gonna look at this the common size balance sheet and we re gonna see what does it tell us looking at the four year balance sheet for whole foods market. If you have any questions any comments by all means email me. ” ..
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