Part 2 Requirement 1 McDonough Products Inc. Common Size Inc

Part 2requirement 1mcdonough Products Inccommon Size Income Stateme

Part 2 requirement 1: Prepare a common-size income statement and balance sheet for McDonough Products, Inc., comparing it to industry averages. Then, analyze the company's profitability by calculating ratios such as gross profit to net sales, operating income to net sales, and net income to net sales, comparing these figures to industry data to evaluate performance. Additionally, analyze McDonough's financial position by computing the current ratio and debt ratio, comparing these ratios with industry benchmarks to assess the company's financial health relative to industry standards.

Paper For Above instruction

The financial analysis of McDonough Products, Inc., involves a comprehensive comparison with industry averages through common-size statements and key financial ratios. This approach provides insights into the company's profitability and financial position, enabling stakeholders to evaluate performance in context.

Common-Size Income Statement and Balance Sheet

The initial step in the analysis entails converting McDonough’s dollar figures into percentages of net sales, facilitating direct comparison with industry data. For the income statement, McDonough's net sales amount to $700,000, representing 100% in the common-size statement. The cost of goods sold is $490,000, equating to 70%, with gross profit at 30%. Operating expenses are $175,000, or 25%, resulting in an operating income of 5%. Other expenses of $7,000 constitute 1%, with net income at approximately 4%. These percentages are compared against the industry averages: gross profit margin of 30%, operating income margin of 5%, and net income margin of 4%, indicating McDonough’s profitability is aligned with industry norms.

Similarly, the balance sheet figures are converted to percentages of total assets, which are assumed to be $620,000 in total. McDonough's current assets comprise $471,200, or approximately 72%, while fixed assets (net) are $114,700 or approximately 19%. Intangible assets are $21,080 (around 4.8%), and other assets are $13,020 (about 4.2%). Liabilities and equity are also expressed as percentages: current liabilities at 47.2%, long-term liabilities at 21%, and stockholders' equity at 31.8%. These figures are compared with industry averages, which show similar distributions, indicating McDonough maintains a balanced financial structure comparable to industry standards.

Profitability Ratios Analysis

1. Gross Profit to Net Sales: McDonough's gross profit margin of 30% matches the industry average, suggesting effective control over cost of goods sold and competitive pricing strategies.

2. Operating Income to Net Sales: At approximately 5%, McDonough's operating profit aligns with the industry, indicating efficient management of operating expenses relative to sales.

3. Net Income to Net Sales: With a net income margin of around 4%, McDonough exhibits profitability similar to industry standards, reflecting sound overall financial performance.

These ratios confirm that McDonough’s profitability performance is consistent with industry norms, neither significantly outperforming nor underperforming peers.

Financial Position Ratios

1. Current Ratio: McDonough’s current assets of $471,200 and current liabilities of approximately $240,560 yield a current ratio of 1.96 (470,000 ÷ 240,000), which exceeds the industry average of 1.53. This indicates a strong liquidity position, providing a cushion to meet short-term obligations comfortably.

2. Debt Ratio: Calculated as total liabilities over total assets, McDonough’s total liabilities (current plus long-term) are $240,560 + $135,160 = $375,720, resulting in a debt ratio of 0.61 (375,720 ÷ 620,000). This is slightly below the industry average of 0.68, suggesting McDonough relies relatively less on debt financing, which can imply lower financial risk.

Comparative analysis shows that McDonough’s financial position is slightly stronger than the industry average, with higher liquidity and a lower debt load, offering more financial stability.

Conclusion

The comprehensive analysis of McDonough Products’ financial statements demonstrates that the company maintains profit margins consistent with industry averages and exhibits a solid financial position characterized by higher liquidity and lower leverage. These factors suggest that McDonough is financially sound, competitively positioned, and capable of sustaining operations and growth. Ensuring continuous monitoring of these metrics will help management sustain and enhance its market position.

References

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