Chapter 12, Problem 32AP

Common-size financial statements and profitability ratios (Learning Objective 2) 20-25 min.

Otto's Auto Sales asked for your help in comparing the company's profit performance and financial position with the average for the auto sales industry. The owner has given you the company’s income statement and balance sheet as well as the industry average data for retailers of used autos.

Otto's Auto Sales Income Statement Compared with Industry Average Year Ended December 31,2018
			OTTO’S	INDUSTRY AVERAGE
		Met Sales	$955,100	100.0%
		Cost of Goods Sold	651,400	64.3%
		Gross Profit	303,700	35,7%
		Operating Expenses	217,800	27.3%
		Operating Income	85,900	8.4%
		Other Expenses	11,500	1.1%
		Net Income	$74,400	7.3%

Otto's Auto Sales Balance Sheet Compared with Industry Average December 31,2018
			OTTO’S	INDUSTRY AVERAGE
		Current Assets	$516,800	77.2%
		Fixed Assets, Net	112,300	16.3%
		Intangible Assets, Net	23,100	2.8%
		Other Assets	27,900	3.7%
		Total Assets	$680,100	100.0%
		Current Liabilities	$260,600	40.1%
		Long-Term Liabilities	129,200	20.3%
		Stockholders' Equity	282,300	39.6%
		Total Liabilities and Stockholders’ Equity	$680,100	100.0%

Requirements

1. 1. Prepare a two-column common-size income statement and a two-column common-size balance sheet for Otto's Auto Sales. The first column of each statement should present Otto’s Auto Sales' common-size statement and the second column should show the industry averages.
2. 2. For the profitability analysis, examine Otto’s Auto Sales'(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 Otto’s profit performance better or worse than the industry average?
3. 3. For the analysis of financial position, examine Otto’s Auto Sales' (a) ratio of current assets to total assets, and (b) ratio of stockholders' equity to total assets. Compare these ratios with the industry averages. Is Otto’s Auto Sales’ financial position better or worse than the industry average?