Love Bug Used Auto Sales asked for your help in comparing the company\'s profit
ID: 2445494 • Letter: L
Question
Love Bug Used Auto Sales asked for your help in comparing the company's profit performance and financial position with the average for the auto sales industry. The proprietor has given you the company's income statement and balance sheet as well as the industry average data for retailers of used autos.
LOVE BUG USED AUTO SALES
Income Statement Compared with Industry Average
Year Ended December 31, 2009
Love Bug Industry Average
Net Sales $521,000 100.0%
Cost of Goods Sold 331,000 63.1%
Gross Profit 190,000 37.9%
Operating expenses 109,000 27.8%
Operating income 81,000 10.1%
Other expenses 3,000 0.4%
Net income $78,000 9.7%
LOVE BUG USED AUTO SALES
Balance Sheet Compared with Industry Average
December 31, 2009
Love Bug Industry Average
Current assets $230,000 70.9%
Plant assets, net 49,000 23.6%
Intangible assets, net 3,000 0.8%
Other assets 15,000 4.7%
Total assets $297,000 100.0%
Current liabilities $136,000 48.1%
Long-term liabilities 41,000 16.6%
Stockholders' equity 120,000 35.3%
Total liabilities and stockholders'
equity $297,000 100.0%
1. Prepare a two-column, common-size income statement and a two-column common-size balance sheet for Love Bug Used Auto Sales. The first column of each statement should present Love Bug's common-size statement and the second column should show the industry averages.
2. For the profitability analysis, examine Love Bug'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 average. Is Love Bugs' profit performance better or worse than the industry average?
3. For the analysis of financial position, examine Love Bugs' (a) ratio of current assets to total assets, (b) ratio of stockholders' equity to total assets. Compare these ratios with the industry averages. Is Love Bugs' financial position better or worse than the industry average?
Explanation / Answer
1
Two-column, common-size income statement
Love Bug
Industry Average
Amount
%
%
Net Sales
521000
100.00%
100%
(521000/521000)
Cost of Goods Sold
331000
63.53%
63.10%
(331000/521000)
Gross Profit
190000
36.47%
37.90%
(190000/521000)
Operating expenses
109000
20.92%
27.80%
(109000/521000)
Operating income
81000
15.55%
10.10%
(81000/521000)
Other expenses
3000
0.58%
0.40%
(3000/521000)
Net income
78000
14.97%
9.70%
(78000/521000)
Two-column common-size balance sheet
Current assets
230000
77.44%
70.90%
(230000/297000)
Plant assets, net
49000
16.50%
23.60%
(49000/297000)
Intangible assets, net
3000
1.01%
0.80%
(3000/297000)
Other assets
15000
5.05%
4.70%
(15000/297000)
Total assets
297000
100.00%
100%
(297000/297000)
Current liabilities
136000
45.79%
48.10%
(136000/297000)
Long-term liabilities
41000
13.80%
16.60%
(41000/297000)
Stockholders' equity
120000
40.40%
35.30%
(120000/297000)
Total liabilities and stockholders' equity
297000
100.00%
100%
(297000/297000)
2
Profitability analysis
Love Bug
Industry Average
Performance
(a) ratio of gross profit to net sales
36.47%
37.90%
Higher ratio is better hence performance of love bag is Bad
(b) ratio of operating income to net sales
15.55%
10.10%
Higher ratio is better hence performance of love bag is Good
(c) ratio of net income to net sales
14.97%
9.70%
Higher ratio is better hence performance of love bag is Good
3
Analysis of financial position
Love Bug
Industry Average
Performance
(a) ratio of current assets to total assets
77.44%
70.90%
Higher ratio is better hence performance of love bag is Good
(b) ratio of stockholders' equity to total assets
40.40%
35.30%
Higher ratio is better hence performance of love bag is Good
1
Two-column, common-size income statement
Love Bug
Industry Average
Amount
%
%
Net Sales
521000
100.00%
100%
(521000/521000)
Cost of Goods Sold
331000
63.53%
63.10%
(331000/521000)
Gross Profit
190000
36.47%
37.90%
(190000/521000)
Operating expenses
109000
20.92%
27.80%
(109000/521000)
Operating income
81000
15.55%
10.10%
(81000/521000)
Other expenses
3000
0.58%
0.40%
(3000/521000)
Net income
78000
14.97%
9.70%
(78000/521000)
Two-column common-size balance sheet
Current assets
230000
77.44%
70.90%
(230000/297000)
Plant assets, net
49000
16.50%
23.60%
(49000/297000)
Intangible assets, net
3000
1.01%
0.80%
(3000/297000)
Other assets
15000
5.05%
4.70%
(15000/297000)
Total assets
297000
100.00%
100%
(297000/297000)
Current liabilities
136000
45.79%
48.10%
(136000/297000)
Long-term liabilities
41000
13.80%
16.60%
(41000/297000)
Stockholders' equity
120000
40.40%
35.30%
(120000/297000)
Total liabilities and stockholders' equity
297000
100.00%
100%
(297000/297000)
2
Profitability analysis
Love Bug
Industry Average
Performance
(a) ratio of gross profit to net sales
36.47%
37.90%
Higher ratio is better hence performance of love bag is Bad
(b) ratio of operating income to net sales
15.55%
10.10%
Higher ratio is better hence performance of love bag is Good
(c) ratio of net income to net sales
14.97%
9.70%
Higher ratio is better hence performance of love bag is Good
3
Analysis of financial position
Love Bug
Industry Average
Performance
(a) ratio of current assets to total assets
77.44%
70.90%
Higher ratio is better hence performance of love bag is Good
(b) ratio of stockholders' equity to total assets
40.40%
35.30%
Higher ratio is better hence performance of love bag is Good
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