Question

View Policies Current Attempt in Progress Dollar Tree Stores, Inc., and Dollar General Corporation are both discount retailers. As their adapted income statements (in $millions) show, Dollar General's sales revenue was more than double that of Dollar Tree. Dollar Dollar Tree General $6,630.5 $14,807.2 Sales 10,109.3 Cost of goods sold 4,252.2 Gross profit 2,378.3 4,697.9 Selling, general, & administrative expenses Net operating income 1,596.2 3,207.1 782.1 1,490.8 Other expense 2.6 265.5 Income before taxes 779.5 1,225.3 Incorme tax expense 291.2 458.6 Net income $488.3 $766.7 (a) Prepare a common-size income statement for each company. (Round answers to 1 decimal place, eg. 50.1%.) Dollar Tree Dollar General Sales Cost of goods sold Gross profit Selling, general & administrative expenses Net operating income Other expense Income before taxes Income tax expense Net income

Answer 1

Under common-size income statement each line item is compared with Sales. Thus, under common-size income statement, each line item viz, Sales, Cost of Goods Sold, Gross profit, expenses, profit before tax, tax, net income, etc. is divided by sales and percentage is calculated which is shown in income statement. As a result, comparison between two companies or between two or more years can be done and analysis of percentages would help in determining the performance of the organization.

Common-size income statement for given question is as below:

Particulars	Dollar Tree			Dollar General
	Amount	Formula	Common size %	Amount	Formula	Common size %
Sales	6,630.50	(6630.50/6630.50)	100.0%	14,807.20	(14807.20/14807.20)	100.0%
Cost of Goods Sold	4,252.20	(4252.20/6630.50)	64.1%	10,109.30	(10109.30/14807.20)	68.3%
Gross Profit	2,378.30	(2378.30/6630.50)	35.9%	4,697.90	(4697.90/14807.20)	31.7%
Selling, general & administrative expenses	1,596.20	(1596.20/6630.50)	24.1%	3,207.10	(3207.10/14807.20)	21.7%
Net Operating Income	782.10	(782.10/6630.50)	11.8%	1,490.80	(1490.80/14807.20)	10.1%
Other expense	2.60	(2.6/6630.50)	0.0%	265.50	(265.50/14807.20)	1.8%
Income before Tax	779.50	(779.50/6630.50)	11.8%	1,225.30	(1225.30/14807.20)	8.3%
Income Tax Expenses	291.20	(291.20/6630.50)	4.4%	458.60	(458.60/14807.20)	3.1%
Net Income	488.30	(488.30/6630.50)	7.4%	766.70	(766.70/14807.20)	5.2%

As per above calculation, although the sales revenue of Dollar General is more than double than sales revenue of Dollar Tree but the performance of Dollar Tree is better than Dollar General. The gross profit of Dollar Tree is 35.9% which is more than that of Dollar General i.e. 31.7%. Further, the Net Income of Dollar Tree i.e. 7.4% is also better than that of Dollar General i.e. 5.2%.