Question

Top managers of Tarrant, Inc. have asked you to compare the company's profit performance and financial position with the average for the industry. The company's accountant have given you the business's income statement, balance sheet, and industry data. Tarrant, Inc. Common-Size Income Statement Data Net sales Cost of sales Gross profit Operating expenses Operating income Other expenses Net income (loss) Tarrant, Inc. Industry Average $500,000 100.00% $355,000 57.30% $145,000 42.70% $120,000 29.40% $25,000 13.30% $7,500 2.50% $17.500 10.80% Tarrant, Inc. Common-Size Balance Sheet Data Current assets Plant assets, net Intangible assets, net Other assets Total assets Tarrant, Inc. Industry Average $496,400 72.10% 121,040 19.00% 27,200 4.80% 35,360 4.10% S680,000 100.00% Current liabilities Long-term liabilities Stockholder's equity Total liabilities and stockholder's equity $266,560 144,160 269,280 S680.000 47.20% 21.00% 31.80% 100.00% Requirements: 1. Prepare a common-size income statement and balance sheet for Tarrant, Inc. The first column of each statement should present the company's common-size statement, and the second column should show the industry averages. 2. For the profitability analysis, compare the company's: (2) ratio of gross profit to neet sales (b) ratio of operating income to net sales, (c) ratio of net income to net sales with the industry averages Is the company's profit performance better or worse than the average for the industry? 3.For the analysis of financial position, calculate Tarrant, Inc. (a) ratios of current assets and current liabilities to total assets (b) ratio of stockholder's equity to total assets Compare these ratios with the industry averages. Is the company's financial performance better or worse than the average for the industry?

Answer 1

Part 1)

The common-size income statement and balance sheet for Tarrant, Inc. are prepared as below:

Common-Size Income Statement

Tarrant, Inc. Common-Size Income Statement Compared with Industry Average Net Sales Cost of Sales Gross Profit Operating Expenses Operating Income Other Expenses Net Income (Loss) Tarrant, Inc. Industry Average 100.00% 100.00% 71.00% 57.30% 29.00% 42.70% 24.00% 29.40% 5.00% 13.30% 1.50% 2.50% 3.50% 10.80%

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Notes:

The calculations for various items in the income statement are given as below:

Net Sales = 500,000/500,000*100 = 100.00%

Cost of Sales = 355,000/500,000*100 = 71.00%

Gross Profit = 145,000/500,000*100 = 29.00%

Operating Expenses = 120,000/500,000*100 = 24.00%

Operating Income = 25,000/500,000*100 = 5.00%

Other Expenses = 7,500/500,000*100 = 1.50%

Net Income (Loss) = 17,500/500,000*100 = 3.50%

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Common-Size Balance Sheet

Tarrant, Inc. Common-Size Balance Sheet Compared with Industry Average Current Assets Plant Assets, Net Intangible Assets, Net Other Assets Total Assets Tarrant, Inc. Industry Average 73.00% 72.10% 17.80% 19.00% 4.00% 4.80% 5.20% 4.10% 100.00% 100.00% Current Liabilities Long-Term Liabilities Stockholder's Equity Total Liabilities and Stockholder's Equity 39.20% 21.20% 39.60% 100.00% 47.20% 21.00% 31.80% 100.00%

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Notes:

The calculations for various items in the balance sheet are given as below:

Current Assets = 496,400/680,000*100 = 73.00%

Plant Assets, Net = 121,040/680,000*100 = 17.80%

Intangible Assets, Net = 27,200/680,000*100 = 4.00%

Other Assets = 35,360/680,000*100 = 5.20%

Total Assets = 680,000/680,000*100 = 100.00%

Current Liabilities = 266,560/680,000*100 = 39.20%

Long-Term Liabilities = 144,160/680,000*100 = 21.20%

Stockholder's Equity = 269,280/680,000*100 = 39.60%

Total Liabilities and Stockholder's Equity = 680,000/680,000*100 = 100%

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Part 2)

The comparison of various ratios is provided as below:

a Ratio of Gross Profit to Net Sales b Ratio of Operating Income to Net Sales C Ratio of Net Income to Net Sales Tarrant, Inc. Industry Average 29.00% 42.70% 5.00% 13.30% 3.50% 10.80%

Tarrant's common-size income statement shows that its ratios of gross profit, operating income and net income to net sales are worse than the industry averages. Overall, Tarrant's profit performance is worse than average for the industry.

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Part 3)

The comparison of various ratios is given as follows:

a Ratio of Current Assets to Total Assets a Ratio of Current Liabilities to Total Assets b Ratio of Stockholder's Equity to Total Assets Tarrant, Inc. Industry Average 73.00% 72.10% 39.20% 47.20% 39.60% 31.80%

Tarrant's common-size balance sheet shows that its ratios of current assets and of current liabilities to total assets, and ratio of stockholders' equity to total assets are better than the industry averages. Overall, Tarrant's financial position is better than average for the industry.