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