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 AverageYear Ended December 31 2010McDonough “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 AverageDecember 31 2010McDonough “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 0.68Requirements1. 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?
