Question

Comparative financial statement data for Donovan Company and Maltese Company, two competitors in the same industry, appear below. All balance sheet data are as of December 31, 2012, and December 31, 2011.

	Donovan Company			Maltese Company
	2012	2011	2012		2011
Net sales	$1,549,035		$339,038
Cost of goods sold	1,080,490		241,000
Operating expenses	302,275		79,000
Interest expense	8,980		2,252
Income tax expense	54,500		6,650
Current Assets	325,975	312,410	83,336		79,467
Common Stock, $10 par	500,000	500,000	120,000		120,000
Retained earnings	173,460	146,595	38,096		28,998
Non-current liabilities	108,500	90,000	29,620		25,000
Current liabilities	65,325	75,815	35,348		30,281

REQUIRED:

(a) Prepare a common-size 2012 income statement using the data for Donovan Company and Maltese Company in columnar form. (A table is needed)

(b) Comment on the relative profitability of the companies by computing the return on assets (Net income/(Average total assets) and the return on total equity (Net income / (Average Shareholders’ Equity) ratios for both companies.

Answer:

(a)

(b)

Answer 1

a) A common size income statement is an income statement in which each account is expressed as a percentage of the value of sales.

Particulars	Donovan		Maltese
	Amount	%	Amount	%
Sales	1,549,035	100	339,038	100
Less:-
COGS	1080490	69.75	241000	71.08
Operating expense	302275	19.51	79000	23.30
Interest expense	8980	0.57	2252	0.66
Incomebefore tax	157290	10.15	16786	4.95
Less income tax	54500	3.52	6650	1.96
net income	102790	6.64	10136	2.99

b)

Avg total assets = Opening + cloing /2

Total assets = Total liab = Common stock + retained earning + current liab + Non current liab

Donovan

2011 = 500000+146595+90000+75815 = 812410

2012 = 500000+173460+108500+65325 = 847285

Avg total assets = (812410 + 847285)/2 = 829847.5

Maltese

2011 = 204279

2012 = 223064

Avg total assets = (204279+223064)/2 = 213671.5

1) Return on net assets = net income / avg total assets

Donovan = 102790/829847.5 *100 = 12.38%

Maltese = 10136/213671.5 *100 = 4.74

2)

Avg shareholder equity = Op + clo / 2

Donovan = (646595+673460)/2 = 660027.5

Maltese = ( 148998+158096) / 2 = 153547

Return on total equity = Net income / Avg Shareholder equity

Donovan = 102790/660027.5 *100 = 15.57%

Maltese = 10136/153547 *100 = 6.60

Donovan earn more profit as compared to Maltese as seen in both the ratios. It has more assets as well as more equity , more sales and more earning.