Comprehensive analysis (Learning Objectives 2, 3, 4)

Top managers of Crescent City Music Company have asked for your help in com¬ paring the company’s profit performance and financial position with the average for the industry. The accountant has given you the company’s income statement and balance sheet and the following data for the industry:

Requirements 1. Prepare a common-size income statement and balance sheet for Crescent City Music Company. The first column of each statement should present Crescent City Music Company’s common-size statement, and the second column should show the industry averages.
2. For the profitability analysis, compute Crescent City’s

(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 Crescent City’s profit performance better or worse than the average for the industry?

3. For the analysis of financial position, compute Crescent City’s

(a) ratios of current assets and current liabilities to total assets and

(b) ratio of stockholders’ equity to total assets. Compare these ratios with the industry averages. Is Crescent City’s financial position better or worse than average for the industry?

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CRESCENT CITY MUSIC COMPANY Income Statement Compared with Industry Average Year Ended December 31, 2008 Crescent Industry City Average Net sales $957,000 100.0% Cost of goods sold 613,000 65.9 Gross profit 344,000 34.1 Operating expenses 204,000 28.1 Operating income 140,000 6.0 Other expenses 10,000 0.4 Net income $130,000 5.6% CRESCENT CITY MUSIC COMPANY Balance Sheet Compared with Industry Average December 31, 2008 Crescent Industry City Average Current assets Fixed assets, net $486,000 74.4% 117,000 20.0 Intangible assets, net Other assets 24,000 0.6 3,000 5.0 Total assets $630,000 100.0% Current liabilities $246,000 45.6% Long-term liabilities 136,000 19.0 Stockholders' equity 248,000 35.4 Total liabilities and stockholders' equity $630,000 100.0%