Interpreting common-size income statements Exhibit 4.7 presents common-size income statements for Standard Denim and Blue Label Jeans, two apparel retailing firms, for three recent years. In addition to the cost of merchandise sold, both firms include occupancy expense for their stores (rent, utilities, depreciation) in cost of goods sold. Standard Denim tends to rely on print advertising to create demand, whereas Blue Libel Jeans relies more heavily on in-store promotions (two-for-one discounts and special daily price reductions). Standard Denim recently expanded into other countries, whereas Blue Label Jeans operates almost exclusively in the United States, Both companies apply U.S. GAAP

a. Suggest possible reasons for the decreasing cost of goods sold to sales percentages for the two firms during the three-year period.

b. Suggest possible reasons why the cost of goods sold to sales percentages for Standard Denim are less than those for Blue Label Jeans.

c. Suggest possible reasons for the increasing selling and administrative expenses to sales percentages for the two firms for the three-year period.

d. Suggest possible reasons why the selling and administrative expenses to sales percentages for Blue Label Jeans are less than those for Standard Denim.

e. Suggest possible reasons for the different pattern of changes in the interest expense to sales percentages for the two firms during the three-year period.

f. Suggest possible reasons for the increasing income tax expense to sales percentages for the two firms during the three-yearperiod.

Standard Denim and Blue Label Jeans EXHIBIT 4.7 Common-Size Income Statements (Problem 29) Standard Denim Blue Label Jeans 2008 2008 2007 2006 2007 2006 Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Other Revenues 1.2 0.1 0.2 0.5 0.6 0.4 Cost of Goods Sold or Services Sold Selling and Administrative Expenses. Interest Expense Income Tax Expense (66.2) (56.8) (59.0) (62.8) (64.1) (56.0) (26.7) (2.2) (24.6) (26.5) (25.8) (25.3) (23.1) (2.2) (3.0) (5.5) (5.4) (5.3) (6.6) (5.5) (4.2) (2.4) (2.3) (2.0) Net Income/Sales. 9.7% 9.1% 8.2% 4.5% 4.2% 3.8%