Description
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.
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.
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?
Requirement
#1
McDonough
Products, Inc.
Common-Size
Income Statement Compared to Industry Average
Year
Ended December 31, 2010
McDonough
Products Industry Average
Net
sales……………………………………………………
Cost of
goods sold………………………………………..
Gross
profit…………………………….…………………..
Operating
expenses……………………………………….
Operating
income………………………………………….
Other
expenses…………………………………………….
Net
income…………………………………………………
McDonough
Products, Inc.
Common-Size
Balance Sheet Compared to Industry Average
Year
Ended December 31, 2010
McDonough
Products Industry Average
Current
assets……………………………………………..
Fixed
assets, net…………………………………………..
Intangible
assets, net………………………………………
Other
assets……………………………………………….
Total
assets………………………………………………..
Current
liabilities………………………….………………..
Long-term
liabilities………………………………………..
Stockholders’
equity……………………………………….
Total
liabilities and stockholders’ equity…………………
Requirement
#2
Requirement
#3
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