(L. OBJ. 2, 3) Common-size statements analysis of profitability and financial position,...

(L. OBJ. 2, 3) Common-size statements analysis of profitability and financial position, and comparison with the industry [20—30 min]

The Klein Department Stores, In., chief executive officer (CEO) has asked you to compare the company’s profit performance and financial position with the average for the industry. The CEO has given you the company’s income statement and balance sheet, as well as the industry average data for retailers.

Requirements

1. Prepare a common-Size income statement and balance sheet for Klein. The first column of each statement should present Klein’s common-size statement, and the second column, the industry averages.

2. For the profitability analysis, compute Klein’s (a) ratio of gross profit co 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 Klein Department Stores’ profit performance better or worse than the industry average?

3. For the analysis of financial position, compute Klein’s (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 Klein Department Stores’ financial position better or worse than the industry averages?