Question

An analyst prepares the following common-size income statements for Perez Company: 20X1 20X2 20X3 Sales 100% 100% 100% Cost of goods sold 50% 52% 53% Selling and administrative expense 16% 12% 9% Interest income 4% 4% 4% Pretax income 30% 32% 34% Income tax expense 15% 16% 17% Net income 15% 16% 17% Based only on this information, Perez's improving net profit margin is most likely a result of:

Answer 1

Perez Company

Based only on this information, Perez's improving net profit margin is most likely a result of:

Decreasing Selling and Administrative Expenses over the years.

Step-by-step explanation:

a) Data and Calculations:

Perez Company

Common-size Income Statements for three years:

20X1 20X2 20X3

Sales 100% 100% 100%

Cost of goods sold 50% 52% 53%

Selling and administrative expense 16% 12% 9%

Interest income 4% 4% 4%

Pretax income 30% 32% 34%

Income tax expense 15% 16% 17%

Net income 15% 16% 17%

b) A review of the common-size income statement of Perez Company shows that its selling and administrative expenses continued to reduce an average of 300 percentage points year on year. This reduction can be clearly seen in its improved net income, which also continued to improve year on year. However, the improvement was hampered by increasing income tax expense, which witnessed the same increase.