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Question 3.S-TP.2: Common-Size Statements Here is the most recent income statem...

Common-Size Statements Here is the most recent income statement for Philippe. Prepare a common-size income statement based on this information. How do you interpret the standardized net income? What percentage of sales goes to cost of goods sold?

PHILIPPE CORPORATION
2018 Income Statement
($ in millions)
Sales $4,053
Cost of goods sold 2,816
Depreciation \underline{550}
Earnings before interest and taxes $687
Interest paid \underline{502}
Taxable income $185
Taxes (21%) \underline{39}
Net income \underline{\underline{\$ \text{   } 146}}
  Dividends $47
   Addition to retained earnings 99
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We’ve calculated the common-size income statement here. Remember that we simply divide each item by total sales.

PHILIPPE CORPORATION
2018  Common-Size Income Statement
Sales 100.0%
Cost of goods sold 69.5
Depreciation \underline{13.6}
Earnings before interest and taxes 17.0
Interest paid \underline{12.4}
Taxable income 4.6
Taxes (21%) \underline{1.0}
Net income \underline{\underline{ \text{   } 3.6}}
  Dividends 1.2%
   Addition to retained earnings 2.4

Net income is 3.6 percent of sales. Because this is the percentage of each sales dollar that makes its way to the bottom line, the standardized net income is the firm’s profit margin. Cost of goods sold is 69.5 percent of sales.

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