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


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FINANCIAL ACCOUNTING – Eighth Edition

Solutions Manual

ACCT 212 : Course Project 2

“Learning Objectives : 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.

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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%

Industry Average Current Ratio 1.53

Industry Average Total Debt to Total Assets 0.68

See red triangle for helpful hints.

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Requirements
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?

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