McDonough Products

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:

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

31-Dec-10

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 1.0

Current liabilities ……………………………………………………….. 240,560 0.5

Long-term liabilities …………………………………………………… 135,160 21.0

Stockholders’ equity…………………………………………………… 244,280 31.8

Total …………………………………………………………………………. $620,000 100.0%

 

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) ratios of current assets and current liabilities to total assets and (b) ratio of stockholders’ equity to total assets. Compare these ratios with the industry averages. Is McDonough Products’ financial position better or worse than the average for the industry?