Question 5 of 50 A financial analyst is reviewing a competitor's income statements for the past two years. Year. Year 2 Sales £250,000 £275,000 Cost of goods sold 155,000 160,000 Gross profit 95,000 115,000 Selling expenses 35,000 © 40,000 General expenses 45,000 © 50,000 Operating income before income taxes 15,000 25,000 Taxes related to operations 2,500 3,500 Net income £ 12,580 £ 21,500 The financial analyst is able to conclude that the competitor's:common size income statements will show operating income before income taxes at 22% for Year 2. common size income statements will show taxes related to operations at 16% for Year 2. common base year income statements will show that gross profit increased by 17% in Year 2 as compared to Year 1. common base year income statements will show that selling expenses increased by 14% in Year 2 as compared to Year 1. Question #201529 Incorrect‘A common-size income statement shows each component as a % of sales (in that year). The percent change between the two years is calculated by taking the change between the most recent year and the prior year and dividing that change by the amount of the prior year. Following is such analysis: vert 8 ver? kX ky sales 250,000 © 1¢ex —275,¢0@ eek Cost of goods sold 355,000 62% 260,000 58% Gross profit 95,000 38% —115,@00 ae 2 Selling expenses 35,000 4k we,goe SK General expenses 45,000 © 18k 50,000 taka Operating incone before income taxes 15,000 X= 5,000 SK Taxes related to operations 2,500 a 3,500 kt Net incore 12,500 «Sk 21,500 ak Commen base year income statements will show that selling expenses increased by 14% in Year 2 as compared to Year 1 is the correct answer. It is the only answer choice that shows selling expenses increased by 14% in Year 2 as compared to Year 1 CMA - Basic Financial Statement Analysis Financial StatementsReferences Surgent CMA Exam Reference Volume(s) 2mor-02