Question

A common size analysis requires the representation of financial statement data in terms of a single financial statement item (or base account or value). What is the most commonly used base item for a common size income statement? O Net sales Total assets Stockholders' equity O Total liabilities Suppose you are conducting an analysis of the financial performance of Cute Camel Woodcraft Company over the past three years. The company did not issue new shares during these three years, and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios. Ratios Calculated Year 1 Price-to-free-cash-flow 6.60 Inventory turnover 13.20 Debt-to-equity 0.50 Year 2 4.62 10.56 0.40 Year 3 3.70 8.45 0.32 Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply. A plausible reason why Cute Camel Woodcraft Company's price to free cash flow ratio has decreased is that investors expect lower cash flow per share in the future. A decline in the inventory turnover ratio could likely he explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors. O A decline in the inventory turnover ratio can be explained by the new inventory management system that the company recently adopted, which led to more efficient inventory management. A decline in the debt-to-equity ratio implies a decline in the creditworthiness of the firm.

Answer 1

The most commonly used base for a common size Income Statement is

Net Sales

Total Assets is used for Common sized Balance Sheet

The correct statements are:

A plausible reason why Cute Camel Woodcraft Company’s price-to-cash-flow ratio has decreased is that investors expect lower cash flow per share in the future.

A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors

Decline in Debt equity ratio does not mean decline in credit worthiness

Higher the inventory turnover ratio, better it is

Hence, decline In the ratio does not represent efficiency