Chapter 15: 32PGB (page 849)

Preparing common-size statements, analysis of profitability and financial position, comparison with the industry, and using ratios to evaluate a company
Consider the data for Randall Department Stores presented in Problem P15-31B.
Requirements
Prepare a common-size income statement and balance sheet for Randall. The first column of each statement should present Randall’s common-size statement, and the second column, the industry averages.
For the profitability analysis, compute Randall’s (a) gross profit percentage and (b) profit margin ratio. Compare these figures with the industry averages. Is Randall’s profit performance better or worse than the industry average?
For the analysis of financial position, compute Randall’s (a) current ratio and (b) debt to equity ratio. Compare these ratios with the industry averages. Assume the current ratio industry average is 1.47, and the debt to equity industry average is 1.83. Is Randall’s financial position better or worse than the industry averages?

Short Answer

Expert verified

The net incomeof Randall and industry averages is 10.9%and 14.1%
Randall’s gross profit percentageand the profit margin ratioare less than the industry average.
Randall’s debt ratio is reliability safe compared to the industry.

Step by step solution

Meaning of Common Size Income Statement

The common size income statement refers to a statement in which the cost of income statements will break down into sales percentages, which would treat the sales figure as 100%.

(1) Preparing a common-size income statement and balance sheet for Randall.

Randall Department Stores Inc. Common-Size Income Statement Year Ended December 31, 2018
	Randall Averages	Industry Average
Net sales revenue	100.00%	100.00%
Cost of goods sold	67.4%	65.8%
Gross profit	32.6%	34.2%
Operating expenses	20.9%	19.7%
Operating Income	11.7%	14.5%
Other expenses	0.8%	0.4%
Net income	10.9%	14.1%

RANDALL DEPARTMENT STORES, INC. Common size Balance sheet The year ended December 31, 2018
	Randall Average	Industry Average

Current assets	67.4%	70.9%
Property, plant, and equipment	26.0	23.6
Intangible assets	1.6	0.8
Other assets	5.0	4.7
Total assets	100.00%	100.00%
Current liabilities	45.8%	48.1%
Long term liabilities	22.6	16.6
Total liabilities	68.4	64.7
Stockholder’s Equity	31.6	35.3%
Total liabilities and stockholders’ equity	100.00%	100.00%

(2) Analysing gross profit and profit margin ratio

	Randall	Industry
Gross profit		34.2%
Profit margin ratio		14.1%

Analysis:

Randall's gross profit percentage and margin ratio are less than the industry average. Randall isn't producing significant sales prices compared to the cost of goods sold, or COGS, which are Randall's costs to produce or buy things.

(3) Analysing Randall’s financial position better or worse than the industry averages

	Randall	Industry
Debt ratio		1.47
Debt to equity ratio		1.83

Analysis:

Randall’s debt ratio is reliability safe compared to Industry, but Randall’s debt-equity ratio is more than the Industry but still considered good.

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ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2013
Net Sales Revenue	\(250,000	\)216,000	\(191,000	\)161,000	\(134,000
Net Sales Revenue Increase	16%	13%	19%	20%	17%
Domestic Comparative Store Sales Increase	5%	6%	4%	7%	9%
Other Income—Net	2,110	1,840	1,760	1,690	1,330
Cost of Goods Sold	189,250	164,592	148,216	126,385	106,396
Selling and Administrative Expenses	41,210	36,330	31,620	27,440	22,540
Interest:
Interest Expense	(1,080)	(1,380)	(1,400)	(1,020)	(830)
Interest Income	125	165	155	235	190
Income Tax Expense	4,470	3,900	3,700	3,320	2,700
Net Income	16,225	11,803	7,979	4,760	3,054
Per Share of Common Stock:
Net Income	1.60	1.30	1.20	1.00	0.78
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	\)30,700	\(27,200	\)26,700	\(24,400	\)21,500
Merchandise Inventory	24,500	22,600	21,700	19,000	17,500	$16,700
Property, Plant, and Equipment, Net	51,400	45,200	40,000	35,100	25,600
Total Assets	106,600	95,000	88,400	78,500	64,600
Current Liabilities	32,300	28,000	28,300	25,000	16,500
Long-term Debt	23,000	21,500	17,600	19,100	12,000
Stockholders’ Equity	51,300	45,500	42,500	34,400	36,100
Financial Ratios
Acid-Test Ratio	1.0	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	17.2%	14.4%	11.2%	8.1%	7.1%
Rate of Return on Common Stockholders’ Equity	35.5%	26.%	20.8%	13.5%	13.0%

Cash	\(19,000
Accounts Receivable, Net	82,000
Merchandise Inventory	183,000
Total Assets	638,000
Accounts Payable	102,000
Accrued Liabilities	35,000
Short-term Notes Payable	50,000
Long-term Liabilities	221,000
Net Income	69,000
Common Shares Outstanding	50,000 shares

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017
Net sales revenue	\(461,000	\)424,000
Cost of goods sold	241,000	211,000
Gross profit	220,000	213,000
Operating expenses	137,000	135,000
Income from operations	83,000	78,000
Interest expenses	9,000	13,000
Income before taxes	74,000	65,000
Income tax expenses	18,000	24,000
Net income	\(56,000	\)41,000

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017	2016
Assets
Current assets
Cash	\(99,000	\)98,000
Accounts receivables, Net	108,000	114,000	107,000
Merchandise inventory	146,000	164,000	202,000
Prepaid expenses	20,000	9,000
Total current assets	373,000	385,000
Property, plant, and equipment	211,000	181,000
Total assets	\(584,000	\)566,000	\(602,000

Liabilities
Total current liabilities	\)227,000	\(246,000
Long-term liabilities	117,000	100,000
Total liabilities	344,000	346,000

Stockholder’s equity
Preferred stock, 3%	98,000	98,000
Common stockholder equity, no par	142,000	122,000	89,000
Total liabilities and stockholder’s equity	\)584,000	\(566,000

MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018
Dollars in thousands	2019	2018	2017
Net Sales Revenue	\( 181,000	\) 160,000
Cost of Goods Sold	93,500	86,500
Selling and Administrative Expenses	45,000	40,500
Interest Expense	8,000	12,000
Income Tax Expense	11,000	10,500
Net Income	\( 23,500	\) 10,500

Additional data:
Total Assets	\( 209,000	\) 187,000	\( 167,000
Common Stockholders’ Equity	96,000	91,500	80,500
Preferred Dividends	2,000	2,000	0
Common Shares Outstanding During the Year	15,000	15,000	10,000

Short Answer

Step by step solution

Meaning of Common Size Income Statement

(1) Preparing a common-size income statement and balance sheet for Randall.

(2) Analysing gross profit and profit margin ratio

(3) Analysing Randall’s financial position better or worse than the industry averages

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