Ratios & Common Size Income Statements Flashcards
Challenge Questions
During 2019, Apple Inc. reported revenues of $260 billion with a gross profit margin of 38%. Meanwhile, Samsung Electronics reported revenues of $200 billion with a gross profit margin of 29%. Considering the common-size analysis, which of the following interpretations is the most accurate?
A) Samsung’s lower absolute gross profit compared to Apple indicates weaker profitability on a relative basis.
B) Apple’s gross profit margin suggests it has superior cost control compared to Samsung’s operations.
C) Samsung’s gross profit margin improvement would likely result from a reduction in administrative expenses rather than cost of goods sold.
D) Apple’s higher gross profit margin reflects its premium pricing strategy, heavily supported by research and development investments.
Answer Explanation:
Correct Answer: D) Apple’s higher gross profit margin reflects its premium pricing strategy, heavily supported by research and development investments.
Explanation:
Apple’s 38% gross profit margin indicates higher relative profitability compared to Samsung’s 29%, reflecting Apple’s ability to charge premium prices due to brand strength, superior technology, and innovation driven by substantial R&D investments.
Option A is incorrect because relative profitability is better assessed by margin, not just absolute figures.
Option B is misleading since higher gross margin typically reflects pricing power rather than purely cost control.
Option C is incorrect because administrative costs typically impact operating margins rather than gross profit margins.
In 2021, Pfizer reported a net income of $22 billion on revenues of $81 billion, while Moderna reported a net income of $12 billion on revenues of $18 billion. When converted to a common-size income statement, what strategic difference between Pfizer and Moderna becomes apparent?
A) Pfizer’s higher absolute net income demonstrates its stronger market position and efficiency compared to Moderna.
B) Moderna’s higher net profit margin indicates superior cost management and pricing power in its core operations relative to Pfizer.
C) Pfizer’s operating structure is more heavily impacted by fixed administrative costs compared to Moderna.
D) Both companies demonstrate similar profitability when accounting for their relative sizes, indicating no strategic advantage.
Answer Explanation:
Correct Answer: B) Moderna’s higher net profit margin indicates superior cost management and pricing power in its core operations relative to Pfizer.
Explanation:
Moderna’s net profit margin of approximately 67% (
12
18
18
12
) significantly exceeds Pfizer’s 27% (
22
81
81
22
), highlighting Moderna’s ability to achieve high profitability on a smaller revenue base, likely due to lower production costs and strong pricing in the mRNA vaccine market.
Option A is incorrect because it focuses on absolute figures rather than relative performance.
Option C is incorrect as administrative costs affect operating profit, not directly reflecting net margin differences between the companies.
Option D fails to recognize the stark difference in relative profitability indicated by net profit margins.
In 2017, Tesla and Ford reported revenues of $11.8 billion and $156.8 billion, respectively. Tesla had a gross profit margin of 19%, while Ford’s was 10%. Analyzing the common-size income statements, what strategic insight can be drawn about Tesla’s and Ford’s business models?
A) Tesla’s higher gross profit margin is primarily due to its cost-cutting initiatives and lower manufacturing overhead compared to Ford.
B) Ford’s lower gross profit margin indicates a lack of pricing power in the automotive industry relative to Tesla.
C) Tesla’s higher gross profit margin suggests a focus on premium electric vehicles, driven by proprietary technology and brand strength.
D) Both companies’ gross profit margins are driven primarily by fluctuating commodity prices, such as steel and aluminum.
Answer Explanation:
Correct Answer: C) Tesla’s higher gross profit margin suggests a focus on premium electric vehicles, driven by proprietary technology and brand strength.
Explanation:
Tesla’s margin reflects its strategic positioning in the premium electric vehicle market, leveraging proprietary battery technology, software, and brand perception, allowing it to command higher prices.
Option A incorrectly attributes Tesla’s margin to cost-cutting; however, Tesla often operates with high R&D and production costs.
Option B fails to consider Ford’s business scale and market dynamics, attributing its margin to pricing without considering broader market pressures.
Option D is misleading as it does not accurately reflect the significant role of branding and technology in Tesla’s margin performance compared to traditional factors affecting Ford.
In 2020, Netflix and Disney reported revenues of $25 billion and $65 billion, respectively, with Netflix achieving an operating profit margin of 18% and Disney just 10%. How does the common-size income statement analysis help explain this performance disparity?
A) Netflix’s superior operating margin is driven primarily by its expansive content library, offering more diversified revenue streams than Disney.
B) Disney’s lower operating margin reflects its reliance on capital-intensive theme parks and traditional media, which faced significant headwinds during the pandemic.
C) The common-size analysis suggests that Disney’s brand portfolio is less effective at driving premium pricing compared to Netflix.
D) Netflix’s operating margin advantage indicates lower administrative and advertising costs compared to Disney.
Answer Explanation:
Correct Answer: B) Disney’s lower operating margin reflects its reliance on capital-intensive theme parks and traditional media, which faced significant headwinds during the pandemic.
Explanation:
Disney’s operating margin suffered in 2020 due to the pandemic’s impact on its high-cost operations, such as theme parks and traditional media, compared to Netflix’s digital, subscription-based model that thrived during the same period.
Option A is incorrect as Disney’s brand and content portfolio are actually more diverse but faced situational impacts.
Option C misrepresents the value of Disney’s extensive brand assets and legacy media presence.
Option D oversimplifies the cost structures without recognizing the substantial impact of fixed costs associated with Disney’s physical assets.
In 2018, Procter & Gamble (P&G) reported a gross profit margin of 50%, while Unilever’s was 46%. During the same year, P&G’s administrative expenses were 15% of revenue compared to Unilever’s 12%. How does this comparison of common-size income statements inform an analysis of their respective operational efficiencies?
A) P&G’s higher gross profit margin indicates it has superior operational efficiency relative to Unilever across all product lines.
B) Unilever’s lower administrative expenses relative to revenue highlight its more streamlined corporate structure compared to P&G.
C) The common-size statements reveal that both companies are equally efficient, as differences in individual expense lines offset each other.
D) P&G’s higher administrative expenses suggest a focus on strategic investments in branding and marketing that drive its gross profit margin advantage over Unilever.
Answer Explanation:
Correct Answer: B) Unilever’s lower administrative expenses relative to revenue highlight its more streamlined corporate structure compared to P&G.
Explanation:
Unilever’s lower administrative expense ratio suggests greater operational efficiency and a more streamlined structure compared to P&G, which may allocate more resources to branding, innovation, or market positioning efforts.
Option A inaccurately generalizes P&G’s gross margin superiority as indicative of overall efficiency without considering operational cost structures.
Option C overlooks the nuanced impact of different cost structures on profitability and operational strategy.
Option D assumes a direct relationship between administrative costs and gross margin, which is often influenced by broader market factors and strategic business models.
