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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?