Question

Based on these Common-size Income Statements for Nike for the periods shown, which of the following statements is most accurate?

Annual Income Statement (Values in Millions)	2015	2014	2013	2012	2011
Sales	100.0%	100.0%	100.0%	100.0%	100.0%
Cost of Sales	53.4%	54.6%	56.6%	57.9%	58.7%
Gross Profit	46.6%	45.4%	43.4%	42.1%	41.3%
S, G & A Expense	30.7%	30.2%	29.3%	28.5%	28.3%
Deprec & Amort	2.1%	2.5%	2.5%	2.8%	2.3%
Operating Income	13.8%	12.6%	11.6%	10.8%	10.7%
Interest Expense	0.3%	0.8%	1.1%	0.5%	1.0%
Pre-tax Income	13.5%	11.8%	10.5%	10.3%	9.7%
Income Taxes	4.7%	4.1%	3.6%	3.5%	3.5%
Net Income	8.8%	7.7%	6.9%	6.8%	6.2%

Nike's net profit margin rose from 2011 to 2015, largely due to a declingin Cost of Sales percentage.

Nike's net profit margin rose from 2011 to 2015, most likely because of increasing Sales over that period.

Nike produced lower profit from each dollar of Sales in 2015 than in 2011, mostly due to an increase in its effective income tax rate.

Nike's overall profitability rose from 2011 to 2015, mostly due to relative decreases in its interest payments and SG&A expenses.

Answer 1

Most Accurate statement :Nike's net profit margin rose from 2011 to 2015, largely due to a declingin Cost of Sales percentage.so option A) is correct.

Explanation a):Nike's net profit margin rose from 2011 to 2015, largely due to a declingin Cost of Sales percentage.

S.No	Particulars	2015	2014	2013	2012	2011
A	Cost of sales(%)	53.4	54.6	56.6	57.9	58.7
B	Decrease in COS When compared to previous year(%)	1.2	2	1.3	0.8
C	Net income(%)	8.80	7.70	6.90	6.80	6.20
D	Increase in Net profit when compared to previous years	1.10	0.80	0.10	0.60

From the above table,we can see that decrease in Cost of sales leads to increase in profit.From the above table,we can see that decrease in Cost of sales leads to increase in profit.

b)Nike's net profit margin rose from 2011 to 2015, most likely because of increasing Sales over that period.

Let us consider an example

Sale price per unit =$ 50

Variable cost per unit = $30

Profit per unit = $ 20

Assuming that 2000 units are sold

Particulars	Amount
Sale value ( 2000*50)	$100,000
less : Variable cost	$60,000
Profit	$40,000

Net profit margin( %) = $ 40000/$ 100000*100=40%

Assuming that 3000 units are sold

Particulars	Amount
Sale value (3000*50)	$150,000
less : Variable cost	$90,000
Profit	$60,000

Net profit margin ( %) = $ 60000/$ 150000*100=40%

we observe that increase in sales does not effect net profit margin.It may effect when we take account fixed expenses.If we take fixed expenses into consideration,if the volume of the sales increases then net profit margin increasess( because fixed expenses remain constant so the total cost goes on decreasing if the volume increases)Since in the question,the volume of sales is not given , we cannot accurately say that increase in sales may leads to increase in Netprofit margin.But one thing we can say increase in sales leads to increase in net profit( in absolute terms)

So option B) is not correct.

c)Nike produced lower profit from each dollar of Sales in 2015 than in 2011, mostly due to an increase in its effective income tax rate.

S.No	Particulars	2015	2014	2013	2012	2011
A	Pre tax income (%)	13.5	11.8	10.5	10.3	9.7
B	Taxes(%)	4.7	4.1	3.6	3.5	3.5
C	Tax rate(B/A)	34.81481	34.74576	34.28571	33.98058	36.08247

The tax rate has been decreased from 36.08247 to 34.81481 from the 2011 to 2015.The tax rate is around 34.5% for last 3 years.So it has not lowered any profit.Even the tax rate continously increased from last years it does not effect much because there are minor variations in the tax rate.so option c) is not correct.

d)Nike's overall profitability rose from 2011 to 2015, mostly due to relative decreases in its interest payments and SG&A expenses.

S.No	Particulars	2015	2014	2013	2012	2011
A	Interest	0.30%	0.80%	1.10%	0.50%	1.00%
B	S,G & A expense	30.70%	30.20%	29.30%	28.50%	28.30%
C	Total	31.00%	31.00%	30.40%	29.00%	29.30%

we can see that almost the expense is increased every year there isno relative decrease in the expense except in 2012 year.so we cannot accurately say that  Nike's overall profitability rose from 2011 to 2015, mostly due to relative decreases in its interest payments and SG&A expenses.so option d) is not correct.