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 |
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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% |
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| McDonough Products, Inc. |
| Balance Sheet Compared with Industry Average |
| December 31, 2010 |
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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% |
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| 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?