Question

8. Analyzing ratios Aa Aa E One of the most important applications of ratio analysis is to compare a company's performance with that of other players in the industry or to compare its own performance over a period of time. Such analyses are referred to as a comparative analysis and trend analysis, respectively. 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? Net sales Total liabilities Stockholders' equity Total assets O 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 Year 2 Year 3 Price to cash flow 6.808.84 9.90 Inventory turnover 13.60 16.32 18.28 Debt to equity 0.40 0.42 0.50 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. An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory management. Cute Camel Woodcraft Company's ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.40 to 0.50. The market value of Cute Camel Woodcraft Company's common shares declined over the three years. A plausible reason why Cute Camel Woodcraft Company's price-to-cash-flow ratio has increased is that investors expect higher cash flow per share in the future. O

Answer 1

1. Answer: Net Sales

Explanation: Common Size income statement is income statement only along with Percentage shown of expense and profit towards sales. i.e. sales are taken as 100% and sales Percentage to bifurcated into percentage ratio of expenses and profit

2. Answer: Statement I and IV can be included in analysis statement

Explanation:

• we can't say debt obligation has worsened because ideal debt-equity ration is 0.5
• Higher Inventory Turnover ratio represent less outstanding average inventory during the year , which indicates higher sales and frequently moving stocks
• Price to cash ratio is Share Price/Operating cash Flow per Share. an increase in this indicates increase in share price as compare to operating cash flow which conclude stock is marked at premium in market and investor expects better performance from company in form of divdends and increased stock price rates