Consider the following income statement data for Odem Inc.:
-Based on common-size analysis, which of the following statements is correct?
A) The increase in sales revenue in 2016 was caused by higher selling and administrative expenses.
B) The company's cost to sales ratio improved in 2016.
C) The increase in gross profit in 2016 was due to increased sales.
D) Net income as a percent of sales declined in 2016.

Question

Consider the following income statement data for Odem Inc.: 
-Based on common-size analysis, which of the following statements is correct?
A) The increase in sales revenue in 2016 was caused by higher selling and administrative expenses. 
B) The company's cost to sales ratio improved in 2016. 
C) The increase in gross profit in 2016 was due to increased sales. 
D) Net income as a percent of sales declined in 2016.

Quizplus · Accepted Answer

Common-size analysis calculates each line item as a percentage of total sales. By using this method, we can compare each line item's relative importance year over year. Looking at the data provided in the income statement, we see that the cost of sales decreased as a percentage of sales from 65% to 60% from 2015 to 2016. This means that the company improved its cost to sales ratio and was able to generate more gross profit per dollar of sales in 2016. Option A is incorrect because we can't determine the cause of the increase in sales revenue from this data alone. Option C is incorrect because we can't determine what caused the increase in gross profit from this data alone. Option D is incorrect because net income as a percent of sales did not decline; it remained the same at 10%.

Consider the Following Income Statement Data for Odem Inc