Reference no: EM13175255

Preparing common-size statements; analyzing
profitability; making comparisons with the industry

Top managers of McDonough Products, Inc., have asked for your help in comparing the company's profit performance and financial position with the average for the industry. The accountant has given you the company's income statement and balance sheet and also the following data for the industry. The problem is that McDonough is in dollars and the Industry Average is in percentages. To complete the analysis you will need to convert McDonoughs dollar amounts to percentages.

 

McDonough Products, Inc.
Income Statement Compared with Industry Average
Year Ended December 31, 2010
						McDonough	Industry Average
Net sales...............................................................................						$        700,000	100.0%
Cost of goods sold..............................................................						490,000	57.3
Gross profit..........................................................................						210,000	42.7
Operating expenses ...........................................................						175,000	29.4
Operating income................................................................						35,000	13.3
Other expenses....................................................................						7,000	2.5
Net income ..........................................................................						$          28,000	10.8%
McDonough Products, Inc.
Balance Sheet Compared with Industry Average
December 31, 2010
						McDonough	Industry Average
Current assets......................................................................						$        471,200	72.1%
Fixed assets, net .................................................................						114,700	19.0
Intangible assets, net ..........................................................						21,080	4.8
Other assets.........................................................................						13,020	4.1
Total .....................................................................................						620,000	100.0%
Current liabilities .................................................................						240,560	47.2%
Long-term liabilities ............................................................						135,160	21.0
Stockholders' equity............................................................						244,280	31.8
Total .....................................................................................						$        620,000	100.0%

1. Prepare a common-size income statement and balance sheet for McDonough Products. The first column of each statement should present McDonough Products' common-size statement, and the second column should show the industry averages.

2. For the profitability analysis, compute McDonough Products' (a) ratio of gross profit to net sales (b) ratio of operating income to net sales, and (c) ratio of net income to net sales. Compare these figures with the industry averages. Is McDonough Products' profit performance better or worse than the average for the industry?

3. For the analysis of financial position, compute McDonough Products' (a) Current ratio and (b) Debt ratio. Compare these ratios with the industry averages. Is McDonough Products' financial position better or worse than the average for the industry?