FINANCIAL ACCOUNTING - Eighth Edition Solutions Manual 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 Page 1 of 3 Requirement #1

McDonough Products, Inc.

Common-Size Income Statement Compared to Industry Average

Year Ended December 31, 2010

McDonough Industry Products Average Net sales……………………………………………………

Cost of goods sold………………………………………..

Gross profit…………………………….…………………..

Operating expenses……………………………………….

Operating income………………………………………….

Other expenses…………………………………………….

Net income………………………………………………… McDonough Products, Inc.

Common-Size Balance Sheet Compared to Industry Average

Year Ended December 31, 2010

McDonough Current assets……………………………………………..

Fixed assets, net…………………………………………..

Intangible assets, net………………………………………

Other assets……………………………………………….

Total assets………………………………………………..

Current liabilities………………………….………………..

Longterm liabilities………………………………………..

Stockholders’ equity……………………………………….

Total liabilities and stockholders’ equity………………… Requirement #2 Requirement #3 Industry Products Average Project 2 Grading Rubric Criteria

Common Size Analysis: (50 pts Excellent Good Poor Very Poor poss) awarded Completeness 25pts poss All requirements are completed in accordance with the All requirements are Most requirements are Many requirements completed and mostly completed that mostly are not completed follow the directions, follow the directions, and/or the directions directions, labeled and labeled and fairly organized well in organized in missing some labels and only somewhat were generally not followed, missing worksheet. organized. labels and unorganized. 25 pts

Accuracy 25pts poss Points All ratios are calculated with worksheet.

2224 pts 1921 pts 018 pts 80% plus of ratios are 6079% of ratios are Less than 60% of calculated with calculated with ratios are calculated accurate results and accurate results and appropriate terms of mostly appropriate accurate results and some appropriate with accurate results and some appropriate expression. terms of expression. terms of expression. 25 pts terms of expression.

2224 pts 1921 pts 018 pts Profitability Ratios: (50 pts poss)

Completeness 25pts poss All requirements are completed in All requirements are Most requirements are Many requirements completed and mostly completed that mostly are not completed accordance with the follow the directions, follow the directions, and/or the directions directions, labeled and labeled and fairly missing some labels were generally not organized well in worksheet. organized in worksheet. and only somewhat organized. followed, missing labels and unorganized. 25 pts

Accuracy 25 pts poss All ratios are 2224 pts 1921 pts 018 pts 80% plus of ratios are 6079% of ratios are Less than 60% of calculated with calculated with accurate results and accurate results and calculated with accurate results and ratios are calculated with accurate results appropriate terms of mostly appropriate expression.

terms of expression. some appropriate terms of expression. and some appropriate terms of expression. 25 pts 2224 pts 1921 pts 018 pts Analysis of Financial Position:(50 pts poss)

Completeness 25pts poss All requirements are completed in accordance with the All requirements are Most requirements are Many requirements completed and mostly completed that mostly are not completed follow the directions, follow the directions, and/or the directions directions, labeled and labeled and fairly organized well in organized in missing some labels and only somewhat were generally not followed, missing worksheet. organized. labels and unorganized. 25 pts

Accuracy 25 pts poss All ratios are worksheet.

2224 pts 1921 pts 018 pts 80% plus of ratios are 6079% of ratios are Less than 60% of calculated with calculated with accurate results and accurate results and calculated with accurate results and ratios are calculated with accurate results appropriate terms of mostly appropriate some appropriate and some appropriate expression. terms of expression. terms of expression. 25 pts terms of expression.

2224 pts 1921 pts 018 pts

Total Points Earned

0

Out of 150 pts