Reference no: EM131790021

"Learning Objectives : Preparing common-size statements; analyzing profitability; making comparisons with the industry"

P13-50A Top managers of O'Hare 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 O'Hare is in dollars and the Industry Average is in percentages. To complete the analysis you will need to convert O'Hare's dollar amounts to percentages.

O'Hare Products, Inc.
Income Statement Compared with Industry Average
Year Ended December 31, 2012

						O'Hare	Industry Average
Net sales...............................................................................						$        960,000	100.0%
Cost of goods sold..............................................................						662,400	57.3%
Gross profit..........................................................................						297,600	42.7%
Operating expenses ...........................................................						220,800	29.4%
Operating income................................................................						76,800	13.3%
Other expenses....................................................................						9,600	2.5%
Net income ..........................................................................						$          67,200	10.8%

O'Hare Products, Inc.
Balance Sheet Compared with Industry Average
December 31, 2012

						O'Hare	Industry Average
Current assets......................................................................						$        292,000	72.1%
Fixed assets, net .................................................................						72,800	19.0%
Intangible assets, net ..........................................................						14,000	4.8%
Other assets.........................................................................						21,200	4.1%
Total .....................................................................................						400,000	100.0%
Current liabilities .................................................................						188,000	47.2%
Long-term liabilities ............................................................						84,000	21.0%
Stockholders' equity............................................................						128,000	31.8%
Total .....................................................................................						$        400,000	100.0%

Requirements

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

2. For the profitability analysis, compare O'Hare 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 with the industry averages. Is O'Hare Products' profit performance better or worse than the average for the industry?

3. For the analysis of financial position, compute O'Hare Products' (a) ratios of current assets and current liabilities to total assets and (b) ratio of stockholders' equity to total assets. Compare these ratios with the industry averages. Is O'Hare Products' financial position better or worse than the average for the industry?