Q31PGB The Randall Department Stores, I... [FREE SOLUTION]

Chapter 15: Q31PGB (page 848)

The Randall Department Stores, Inc. chief executive officer (CEO) has asked you to compare the company鈥檚 profit performance and financial position with the averages for the industry. The CEO has given you the company鈥檚 income statement and balance sheet as well as the industry average data for retailers.
RANDALL DEPARTMENT STORES, INC.
Income Statement Compared with Industry Average
Year Ended December 31, 2018
Randall
Industry Average
Net Sales Revenue
$ 783,000
100.0%
Cost of Goods Sold
527,742
65.8
Gross Profit
255,258
34.2
Operating Expenses
163,647
19.7
Operating Income
91,611
14.5
Other Expenses
6,264
0.4
Net Income
$ 85,347
14.1%
RANDALL DEPARTMENT STORES, INC.
Balance Sheet Compared with Industry Average
December 31, 2018
Randall
Industry Average
Current Assets
$ 310,040
70.9%
Property, Plant, and Equipment, Net
119,600
23.6
Intangible Assets, Net
7,360
0.8
Other Assets
23,000
4.7
Total Assets
$ 460,000
100.0%
Current Liabilities
$ 210,680
48.1%
Long-term Liabilities
103,960
16.6
Total Liabilities
314,640
64.7
Stockholders鈥� Equity
145,360
35.3
Total Liabilities and Stockholders鈥� Equity
$ 460,000
100.0%
Requirements
Prepare a vertical analysis for Randall for both its income statement and balance sheet.
Compare the company鈥檚 profit performance and financial position with the average for the industry

Short Answer

Expert verified

Net income is 10.90%
Compared to the industry average, Randall's gross profit % and profit margin ratio are below average, showings poor profit performance.

Step by step solution

Meaning of Vertical analysis

Each line item in the financial statements is shown as a percentage of the base amount in a vertical analysis. For instance, in the asset portion of the balance sheet, the items are given as a percentage of the total assets or liabilities.

(1) Preparing vertical analysis

Prepare the vertical analysis of the income statement

RANDALL DEPARTMENT STORES, INC. Vertical Analysis of Income Statement The year ended December 31, 2018
	Amount ($)	Percentage Of Total
Net sales revenue	$783,000	100.00%
Cost of goods sold	$527,742	67.40%
Gross profit	$255,258	32.60%
Operating expenses	$163,647	20.90%
Operating Income	$91,611	11.70%
Other expenses	$6,264	0.80%
Net income	$85,347	10.90%

Prepare the vertical analysis of the balance sheet

RANDALL DEPARTMENT STORES, INC. Vertical Analysis of Balance sheet The year ended December 31, 2018
	Amount ($)	Percentage Of Total
Assets:
Current assets	$310,040	67.40%
Property, plant and equipment	$119,600	26.00%
Intangible assets	$7,360	1.60%
Other assets	$23,000	5.00%
Total assets	$460,000	100.00%

Liabilities:
Current liabilities	$210,680	45.80%
Long term liabilities	$103,960	22.60%
Total liabilities	$314,640	68.40%

Stockholder鈥檚 Equity
Stockholder鈥檚 Equity	$145,360	31.60%
Total liabilities and stockholders鈥� equity	$460,000	100.00%

(2) Comparing the company’s profit performance and financial position with the average for the industry.

Compare the profit performance with the industry average as follows:

Comparison of Vertical Analysis of Income Statement The year ended December 31, 2018
	Amount ($)	RDS Inc.	Industry Average
Net sales revenue	$783,000	100.00%	100.00%
Cost of goods sold	$527,742	67.40%	65.80%
Gross profit	$255,258	32.60%	34.20%
Operating expenses	$163,647	20.90%	19.70%
Operating Income	$91,611	11.70%	14.50%
Other expenses	$6,264	0.80%	0.40%
Net income	$85,347	10.90%	14.10%

Compare the financial position with the industry average as follows:

Comparison of vertical analysis of Income statement The year ended December 31, 2018
	Amount ($)	RDS Inc.	Industry average
Assets:
Current assets	$310,040	67.40%	70.90%
Property, plant and equipment	$119,600	26.00%	23.60%
Intangible assets	$7,360	1.60%	0.80%
Other assets	$23,000	5.00%	4.70%
Total assets	$460,000	100.00%	100.00%

Liabilities:
Current liabilities	$210,680	45.80%	48.10%
Long term liabilities	$103,960	22.60%	16.60%
Total liabilities	$314,640	68.40%	64.70%

Stockholder鈥檚 Equity
Stockholder鈥檚 Equity	$145,360	31.60%	35.30%
Total liabilities and stockholders鈥� equity	$460,000	100.00%	100.00%

Randall has a poor profit performance compared to the industry, as evidenced by its gross profit percentage and profit margin ratio is lower than the industry average. Compared to the industry average, they have a little higher investment in plant and intangible assets. A more significant percentage of debt would typically indicate a weaker financial situation than the industry average to total assets than the industry average.

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XYZ ATHLETIC SUPPLY, INC.
Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2016
Net sales revenue	\(275,000	\)222,000	\(199,000	\)171,000	131,000
Net Sales Revenue Increase	24%	12%	16%	31%	17%
Domestic Comparative Store Sales Increase	6%	6%	5%	8%	10%
Other Income鈥擭et	2,090	1,780	1,770	1,700	1,310
Cost of Goods Sold	208,725	169,386	154,822	134,235	103,883
Selling and Administrative Expenses	41,280	36,340	31,670	27,450	22,540
Interest:
Interest Expense	(1,070)	(1,370)	(1,330)	(1,100)	(800)
Interest Income	140	155	150	230	140
Income Tax Expense	4,420	3,900	3,610	3,390	2,730
Net Income	21,735	12,939	9,488	6,755	2,497
Per Share of Common Stock:
Net Income	1.10	0.80	0.70	0.50	0.28
Dividends	0.45	0.43	0.39	0.35	0.31
Financial Position
Current Assets, Excluding Merchandise Inventory	\(30,900	\)27,200	\(26,800	\)24,400	$21,800
Merchandise Inventory	24,700	22,400	21,600	19,300	17,000	16,800
Property, Plant, and Equipment, Net	51,600	46,200	40,500	35,000	25,200
Total Assets	107,200	95,800	88,900	78,700	64,000
Current Liabilities	32,600	27,800	28,800	25,600	17,000
Long-term Debt	23,000	21,200	16,800	18,600	12,900
Stockholders鈥� Equity	51,600	46,800	43,300	35,500	34,100
Financial Ratios
Acid-Test Ratio	0.9	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	22.5%	15.5%	12.8%	10.9%	9.9%
Rate of Return on Common Stockholders鈥� Equity	44.2%	28.7%	24.1%	19.4%	18.9%

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Short Answer

Step by step solution

Meaning of Vertical analysis

(1) Preparing vertical analysis

(2) Comparing the company’s profit performance and financial position with the average for the industry.

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RANDALL DEPARTMENT STORES, INC. Income Statement Compared with Industry Average Year Ended December 31, 2018
	Randall	Industry Average
Net Sales Revenue	\( 783,000	100.0%
Cost of Goods Sold	527,742	65.8
Gross Profit	255,258	34.2
Operating Expenses	163,647	19.7
Operating Income	91,611	14.5
Other Expenses	6,264	0.4
Net Income	\) 85,347	14.1%

RANDALL DEPARTMENT STORES, INC. Balance Sheet Compared with Industry Average December 31, 2018
	Randall	Industry Average
Current Assets	\( 310,040	70.9%
Property, Plant, and Equipment, Net	119,600	23.6
Intangible Assets, Net	7,360	0.8
Other Assets	23,000	4.7
Total Assets	\) 460,000	100.0%

Current Liabilities	\( 210,680	48.1%
Long-term Liabilities	103,960	16.6
Total Liabilities	314,640	64.7
Stockholders鈥� Equity	145,360	35.3
Total Liabilities and Stockholders鈥� Equity	\) 460,000	100.0%