Question

The Randall Department Stores, Inc. chief executive officer (CEO) has asked you to compare the company’s profit performance and financial position with the averages 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.

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

Requirements

1. Prepare a vertical analysis for Randall for both its income statement and balance sheet.

Compare the company’s profit performance and financial position with the average for the industry

Short answer

1. Net income is 10.90%
2. 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’s Equity
Stockholder’s Equity	$145,360	31.60%
Total liabilities and stockholders’ 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’s Equity
Stockholder’s Equity	$145,360	31.60%	35.30%
Total liabilities and stockholders’ 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.