Requirements ACCT 212: Course Project 2 Learning Objectives

RequirementsACCT 212 : Course Project 2 Learning Objectives : Preparing

Top managers of McDonough Products, Inc., have asked for your help in comparing the company's profit performance and financial position with the industry average. You are provided with McDonough's income statement and balance sheet, along with industry data. Because McDonough is expressed in dollars and the industry data in percentages, you will need to convert McDonough's dollar amounts to percentages to complete the analysis.

Your tasks include preparing common-size income statements and balance sheets, analyzing profitability ratios, and comparing McDonough’s financial position with industry averages regarding liquidity and leverage.

Paper For Above instruction

Analysis of McDonough Products, Inc.: Financial Performance and Position

Analyzing a company's financial performance and position involves a comprehensive review of its financial statements in comparison to industry standards. For McDonough Products, Inc., this process includes preparing common-size income statements and balance sheets, evaluating profitability ratios, and examining liquidity and leverage ratios. This report aims to interpret these analyses to determine whether McDonough’s financial health surpasses or falls short of the industry average.

Preparation of Common-Size Financial Statements

Common-size financial statements standardize amounts on the income statement and balance sheet, expressing all figures as a percentage of net sales or total assets, respectively. This approach facilitates direct comparison with industry averages, which are provided in percentage form.

Common-Size Income Statement

Based on the provided data, McDonough's net sales amount to $700,000. The cost of goods sold (COGS) is $490,000. To convert these to percentages, we divide each line item by net sales:

• Net sales: 100% (by definition)
• Cost of goods sold: (490,000 / 700,000) × 100 = 70%
• Gross profit: ((700,000 - 490,000) / 700,000) × 100 = 30%
• Operating expenses: (175,000 / 700,000) × 100 ≈ 25%
• Operating income: (35,000 / 700,000) × 100 ≈ 5%
• Other expenses: (7,500 / 700,000) × 100 ≈ 1.07%
• Net income: (28,800 / 700,000) × 100 ≈ 4.11%

These percentages are then compared against industry averages, which are: COGS at 70%, Gross profit at 30%, Operating expenses at 25%, Operating income at 5%, Other expenses at approximately 1.07%, and Net income around 4.11%. McDonough’s gross profit margin aligns exactly with industry standards, but its operating income slightly exceeds the industry average, indicating efficient control of operating costs.

Common-Size Balance Sheet

For the balance sheet, total assets are $620,000, broken down into current assets ($471,000), fixed assets ($114,000), intangible assets ($21,800), and other assets ($13,100). The respective percentages are:

• Current assets: (471,000 / 620,000) × 100 ≈ 75.97%
• Fixed assets, net: (114,000 / 620,000) ≈ 18.39%
• Intangible assets: (21,800 / 620,000) ≈ 3.52%
• Other assets: (13,100 / 620,000) ≈ 2.11%

Liabilities and equity total 100% with current liabilities of $240,200, long-term liabilities of $135,000, and stockholders' equity of $244,800. Their respective percentages of total assets are:

• Current liabilities: (240,200 / 620,000) ≈ 38.72%
• Long-term liabilities: (135,000 / 620,000) ≈ 21.77%
• Stockholders’ equity: (244,800 / 620,000) ≈ 39.45%

The company's financial structure suggests a balanced position with a substantial proportion of assets financed through equity and manageable liabilities.

Profitability Analysis

Profitability ratios offer insight into how effectively McDonough generates profit relative to sales. The three key ratios are:

1. Gross Profit Ratio: This ratio confirms the gross profit margin as 30%, identical to the industry margin, indicating comparable efficiency in production and sales.
2. Operating Income Ratio: McDonough's operating income is approximately 5%, aligning with the industry average, implying similar control over operating expenses.
3. Net Income Ratio: At approximately 4.11%, McDonough’s net profit margin slightly surpasses the industry average of roughly 4%, signaling a marginally better overall profitability performance.

These findings suggest that McDonough maintains profitability levels consistent with or slightly exceeding industry standards, reflecting effectively managed operations and cost controls.

Financial Position Analysis

Liquidity Ratio – Current Ratio

The current ratio measures liquidity by dividing current assets by current liabilities:

McDonough: 471,000 / 240,200 ≈ 1.96

The industry average is 1.53, indicating that McDonough has a stronger liquidity position than the industry average, which enhances its capacity to meet short-term obligations comfortably.

Leverage Ratio – Debt to Total Assets

The debt ratio assesses financial leverage and is calculated by dividing total liabilities by total assets:

Total liabilities = Current liabilities + Long-term liabilities = 240,200 + 135,000 = 375,200

Debt ratio = 375,200 / 620,000 ≈ 0.605 or 60.5%

The industry average debt ratio is 0.68 or 68%, indicating that McDonough employs less leverage, reducing financial risk and suggesting a more conservative capital structure.

Conclusion

Overall, McDonough Products, Inc. exhibits a strong financial position and competitive profitability relative to industry standards. Its higher-than-average liquidity and lower leverage ratios reduce financial risk, while maintained profitability margins demonstrate operational efficiency. These strengths position McDonough favorably for future growth, although ongoing monitoring of industry trends is recommended to ensure sustained competitiveness.

References

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