Question

e average for the industry. The CEO has given your company's The Rim Department Stores, Inc. chief executive cfficer (CEO) has asked you to compare the company's profit performance and transportow nne income statement and balance sheet well as the industry average data for retailers Click the icon to view the income statement) Click the icon to view the balance sheet) en Requirements. Prepare a common income atement and balance sheet form. The first column of each statement should present Ra's coro -se statement and the second column, the industry averages Begin by preparing the commons.ze income statement for Rim (Round your answers to one decimal place XX%) Rim Department Stores, Inc. Requirements Common-Sue income Statement Year Ended December 31, 2018 1. Prepare a common-size income statement and balance sheet for Rim. The first column of each statement should present Rm's common size statement, and the second column, the industry Nel Sales Revenue averages Cost of Goods Sold 2. For the profitability analysis, compute Rima gross profpercentage and profit margin ratio. Compare these figures with the industry averages is Rim's profit performance better or Gross Pront worse than the industry average? Operating Expenses For the analysis of financial pour computers a current rate and deb u t at Compare these ratios with the industry Assume te rent industry average is Operating income 1.47. and t o get industry 183 R ancal position beter or worse hante e r ? Print Done Erbor any number in the folds and then click Check Answer

Answer 1

Net Sales revenue Less: Cost of goods sold Gross profit Operating Expense Operating Income Other expense Net income Rim Department Stores, Inc. Common-Size Income Statement For the Year Ended December 31, 2018 Rim Industry Average Amount Percentage of Sales Percentage of Sales 779,000 100.0% 100.0% 527,383 67.7% 65.8% 251,617 32.3% 34.2% 160,474 20.6% 19.7% 91,143 11.7% 14.5% 7,790 1.0% 0.4% $ 83,353 10.7% 14.1% Rim Department Stores, Inc. Common-Size Balance Sheet At December 31,2018 Assets Rim Amount % of Total Assets Industry Average % of Total Assets Current assets Propery, Plant, and Equipment, Net Intangible assets, Net Other assets Total assets 70.9% 23.6% 0.8% 4.7% 100.0% 304,650 67.70% 117,900 26.20% 6,300 1.40% 21,150 4.70% 450,000 100.0% Liabilities and Shareholders' Equity Rim Amount % of Total Assets 206,100 45.8% 103,500 23.0% 309,600 68.8% 140,400 31.2% 450,000 100.0% Current liabilities Long-term liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity Industry Average % of Total Assets 48.1% 16.6% 64.7% 35.3% 100.0% a Gross profit percentage b Profit margin ratio 32.3% 10.7% Industry Average 34.2% 14.1% Interpretations: Analysis of change in profit: The gross profit percentage of Rim is slightly lower than the industry average. But the profit margin ration of Rim is 10.7% compared to the industry average of 14.1%. The rate of decrease is quite significant and indicates an decreasing trend of profitability. This has resulted due to (a) decrease in sales; b) unfavourable control over cost of goods sold and (c) decrease in operating expense. Thus, it may be concluded that the profitability position is unsound.

Rim Calculation Industry Average Calculation Answer Answer Ratio Current Ratio Formula Current Assets Current Liabilities 67.7/45.8 1.48 70.9/48.1 Total Liabilities Stockholders Equity b Debt-Equity Ratio 68.8/31.2 2.21 64.7/35.3 Current Ratio: The standard expected ratio is 2, that is, the current assets should be double of current liabilities. The actual ratio is 1.48 which is slightly greater than the industry avegare of 1.47. It indicates solvency of the company. Its current assets are higher than its current liabilities resulting in a positive working capital. Debt-Equity Ratio: This ratio shows whether debts are low or high in comparison to shareholders funds. Low ratio indicates-(i) Better Safety margin for creditors and (ii) Over investment of capital from the viewpoint of shareholders. The usual ratio is 1:2., that is, the Debts should not be more than 50% of Equity. Here the ratio 2.21 which is very high (even higher than the industry average) which indicates that the company have adequate loan facility. It depends too much on outside capital. There is under capitalisation. Long-term solvency has been totally effected due to the existence of a heavy amount of loan. Regular payments of interests on loans must have caused a heavy outflow of funds.