29 Jun Question ACCT 212 : Course Project 2
Question
ACCT 212 : Course Project 2
Learning Objectives : Preparing commonsize 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
Net sales…………………………………………………………………….
Cost of goods sold……………………………………………………..
Gross profit………………………………………………………………..
Operating expenses …………………………………………………..
Operating income……………………………………………………….
Other expenses…………………………………………………………..
Net income ………………………………………………………………..
$700,000
490,000
210,000
175,000
35,000
7,000
$28,000
Industry
Average
100.0%
57.3
42.7
29.4
13.3
2.5
10.8%
McDonough Products, Inc.
Balance Sheet Compared with Industry Average
December 31, 2010
Industry
McDonough
Average
Current assets…………………………………………………………….
Fixed assets, net ………………………………………………………..
Intangible assets, net ………………………………………………….
Other assets……………………………………………………………….
Total ………………………………………………………………………….
$471,200
114,700
21,080
13,020
620,000
72.1%
19.0
4.8
4.1
100.0%
Current liabilities ………………………………………………………..
Longterm liabilities ……………………………………………………
Stockholders’ equity……………………………………………………
Total ………………………………………………………………………….
240,560
135,160
244,280
$620,000
47.2%
21.0
31.8
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 commonsize income statement and balance sheet for McDonough Products. The first column of each statement should present McDonough Products’ commonsize 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?
Chapter 13: Financial Statement Analysis
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