Week 3

Question  1

Referencing this week’s readings and lecture, address the following:

•    What are the two causes of an increasing or decreasing sales number?

•    Discuss all the reasons that might explain an increase or decrease in gross profit.

Question 2

Income statements are presented in the table below for the Elf Corporation for the years ending December 31, 2010, 2009, and 2008. Write a one-paragraph analysis of Elf Corporation’s profit performance for the period.  Create a common-sized income statement for the three years. What conclusions can you draw from the different parts of the statement? What are the causes and effects of Elf’s performance for those three years?

Elf Corporation Income Statements for the Years Ending December 31

(in millions)    2010    2009    2008

Sales    $700    $650    $550

Cost of goods sold     350     325     275

Gross profit    350    325    275

Operating Expenses:               

Administrative    100    100    100

Advertising and marketing        50        75         75

Operating profit    $200    $150    $100

Interest expense        70        50       30

Earnings before tax    $130    $100    $ 70

Tax expense (50%)         65        50         35

Net income    $   65    $   50    $   35