7. The Russell Department Stores, Inc., chief executive officer (CEO) has asked you to compare the companys profit performance and financial position with the average for the industry. The CEO has given you the companys income statement and balance sheet, as well as the industry average data for retailers.

Requirements

R1. Prepare a common-size income statement and balance sheet for Russell. The first column of each statement should present Russells common-size statement, and the second column, the industry averages.

R2. For the profitability analysis, compute Russells (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 Russells profit performance better or worse than the industry average?

RUSSELL DEPARTMENT STORES, INC. Income Statement Compared with Industry Average Year Ended December 31, 2010 Industry Average Russell Net sales Cost of goods sold Gross profit Operating expenses Operating income Other expenses Net income $ 777,000 523,698 253,302 162,393 90,909 7,770 $ 83,139 100.0% 65.8 34.2 19.7 14.5 0.4 14.1%