Cornerstones of Financial Accounting
4th Edition
ISBN: 9781337690881
Author: Jay Rich, Jeff Jones
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 12, Problem 91PSA
A Comparing Financial Ratios
Presented below are selected ratios the four firms, Badgley is a heavy equipment manu1icturer. Reagan is a newspaper publisher. Klein is a food manufacturer, and Taylor is a grocery chain.
Required:
1. Which firm has the weakest
2. CONCEPTUAL CONNECTION Explain why the turnover ratios vary so much among the four firms.
3. CONCEPTUAL CONNECTION Explain why the return on equity ratio is larger than the return on asset ratio for all four firms.
4. CONCEPTUAL CONNECTION Discuss whether the large differences in the return on equity ratios can exist over long periods of time.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Interpreting liquidity and activity ratios The table, shows key financial data for three firms that compete in the consumer products market: Procter & Gamble, Colgate-Palmolive, and Clorox.
a. Calculate each of the following ratios for all three companies: current ratio, quick ratio, inventory turnover, average collection period, total asset turnover.
b. What company is in the position of having greatest liquidity?
c. Would you say that the three companies exhibit similar performance or quite different performance in terms of collecting receivables? Why do you think that might be?
d. Which company has the most rapid inventory turnover? Which company appears to be least efficient in terms of total asset turnover? Are your answers to those questions a little surprising? If a company is best at inventory turnover and worst at total asset turnover, what do
you think that means?
a. For the three companies, the current ratios are: (Round to three decimal places.)
Colgate-Palmolive
Current…
Sales
Cost of goods sold
Receivable
Inventory
Procter & Gamble
$65,235
32,973
4,732
4,795
25,568
28,901
117,030
Total current assets
Total current liabilities
Total assets
(Note: All dollar values are in thousands.)
Colgate-Palmolive
$15,208
6,077
1,415
1,173
4,348
3,291
12,134
Clorox
$5,873
3,227
517
500
1,544
2,043
4,579
DuPont system of analysis Use the following financial information for AT&T and Verizon to
conduct a DuPont system of analysis for each company.
Sales
Earnings available for common stockholders
Total assets
Stockholders' equity
a. Which company has the higher net profit margin? Higher asset turnover?
b. Which company has the higher ROA? The higher ROE?
c. Which company has the higher financial leverage multiplier?
a. Net profit margin (Round to three decimal places.)
AT&T
Net profit margin
AT&T
$164,000
13,333
403,921
201,934
Verizon
Verizon
$126,280
13,608
244,280
24,232
Chapter 12 Solutions
Cornerstones of Financial Accounting
Ch. 12 - Describe how some of the primary groups of users...Ch. 12 - Prob. 2DQCh. 12 - Prob. 3DQCh. 12 - Prob. 4DQCh. 12 - Prob. 5DQCh. 12 - Prob. 6DQCh. 12 - Prob. 7DQCh. 12 - Prob. 8DQCh. 12 - Prob. 9DQCh. 12 - Prob. 10DQ
Ch. 12 - Prob. 11DQCh. 12 - 12. Why are higher asset turnover ratios...Ch. 12 - Prob. 13DQCh. 12 - Prob. 14DQCh. 12 - Prob. 15DQCh. 12 - Prob. 16DQCh. 12 - Which of the following use financial statement...Ch. 12 - Prob. 2MCQCh. 12 - Prob. 3MCQCh. 12 - Prob. 4MCQCh. 12 - Prob. 5MCQCh. 12 - Prob. 6MCQCh. 12 - Prob. 7MCQCh. 12 - Which type of analysis compares a single...Ch. 12 - Which of the following types of analysis compares...Ch. 12 - Which of the following types of analysis is...Ch. 12 - Prob. 11MCQCh. 12 - Prob. 12MCQCh. 12 - Prob. 13MCQCh. 12 - Partial information from Fabray Companys balance...Ch. 12 - Hummel Inc. has $30,000 in current assets and...Ch. 12 - Prob. 16MCQCh. 12 - A firms quick ratio is typically computed as: a....Ch. 12 - Prob. 18MCQCh. 12 - Prob. 19MCQCh. 12 - Prob. 20MCQCh. 12 - Prob. 21MCQCh. 12 - Prob. 22MCQCh. 12 - Prob. 23MCQCh. 12 - When analyzing a companys debt to equity ratio,...Ch. 12 - Prob. 25MCQCh. 12 - Prob. 26MCQCh. 12 - Prob. 27MCQCh. 12 - Prob. 28MCQCh. 12 - Prob. 29MCQCh. 12 - Prob. 30MCQCh. 12 - Which of the following ratios is used to measure...Ch. 12 - Prob. 32MCQCh. 12 - Selected information for Berry Company is as...Ch. 12 - Which of the following ratios is used to measure a...Ch. 12 - Prob. 35MCQCh. 12 - Prob. 36MCQCh. 12 - Prob. 37MCQCh. 12 - Prob. 38MCQCh. 12 - Which of the following are not part of common...Ch. 12 - Prob. 40MCQCh. 12 - Prob. 41MCQCh. 12 - Prob. 42MCQCh. 12 - Which of the following is not included in the...Ch. 12 - When a Dupont analysis reveals that a company has...Ch. 12 - Prob. 45MCQCh. 12 - Cross Sectional Analysis Cross sectional analysis...Ch. 12 - Prob. 47CECh. 12 - Prob. 48CECh. 12 - Short-Term Liquidity Ratios Three ratios...Ch. 12 - Debt Management Ratios Selected data from the...Ch. 12 - Debt Management and Short-Term Liquidity Ratios...Ch. 12 - Asset Efficiency Ratios Selected financial...Ch. 12 - Profitability Ratios The following data came from...Ch. 12 - Prob. 54CECh. 12 - Prob. 55CECh. 12 - Prob. 56CECh. 12 - Prob. 57BECh. 12 - Prob. 58BECh. 12 - Prob. 59BECh. 12 - Short-Term Liquidity Ratios Larry, Curly, and Moe...Ch. 12 - Debt Management Ratios Glow Corporation provides...Ch. 12 - Debt Management and Short-Term Liquidity Ratios...Ch. 12 - Asset Efficiency Ratios Rumsford Inc.s financial...Ch. 12 - Prob. 64BECh. 12 - Profitability Ratios Tinker Corporation operates...Ch. 12 - Profitability Ratios Katrina Corp. is a publicly...Ch. 12 - Prob. 67BECh. 12 - Prob. 68ECh. 12 - Prob. 69ECh. 12 - Prob. 70ECh. 12 - Prob. 71ECh. 12 - Horizontal Analysis of Income Statements...Ch. 12 - Prob. 73ECh. 12 - Prob. 74ECh. 12 - Prob. 75ECh. 12 - Prob. 76ECh. 12 - Prob. 77ECh. 12 - Prob. 78ECh. 12 - Prob. 79ECh. 12 - Asset Efficiency Ratios Refer to financial...Ch. 12 - Prob. 81ECh. 12 - Prob. 82ECh. 12 - Prob. 83ECh. 12 - Prob. 84PSACh. 12 - Prob. 85PSACh. 12 - Prob. 86PSACh. 12 - A Using Common Size Statements The following...Ch. 12 - Prob. 88PSACh. 12 - Prob. 89PSACh. 12 - Prob. 90PSACh. 12 - A Comparing Financial Ratios Presented below are...Ch. 12 - A Preparation of Ratios Refer to the financial...Ch. 12 - Accounting Alternatives and Financial Analysis...Ch. 12 - Prob. 84PSBCh. 12 - Prob. 85PSBCh. 12 - Prob. 86PSBCh. 12 - Prob. 87PSBCh. 12 - Prob. 88PSBCh. 12 - Prob. 89PSBCh. 12 - Prob. 90PSBCh. 12 - Comparing Financial Ratios Presented below are...Ch. 12 - Prob. 92PSBCh. 12 - Problem 1 2-93B Accounting Alternatives and...Ch. 12 - Prob. 94CCh. 12 - Prob. 95.1CCh. 12 - Prob. 95.2CCh. 12 - Prob. 96.1CCh. 12 - Prob. 96.2CCh. 12 - Prob. 97.1CCh. 12 - Prob. 97.2CCh. 12 - Prob. 97.3CCh. 12 - Prob. 97.4CCh. 12 - Analyzing Growth Consolidated financial statements...Ch. 12 - Analyzing Growth Consolidated financial statements...Ch. 12 - Prob. 98.1CCh. 12 - Prob. 98.2CCh. 12 - Prob. 98.3CCh. 12 - CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT The...Ch. 12 - Prob. 99.2CCh. 12 - Prob. 99.3CCh. 12 - Prob. 99.4CCh. 12 - Prob. 99.5C
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Comparing Financial Ratios Presented below are selected ratios for four firms. Tweeter is a distiller. Clinton is a jewelry retailer, Smith is an airline, and Orlando is a hotel chain. Required: 1. CONCEPTUAL CONNECTION Explain why the long-term debt to equity ratio is so much higher for the airline and hotel chain than it is for the distiller and jewelry retailer. 2. CONCEPTUAL CONNECTION Explain why the turnover ratios vary so much among the four firms. 3. CONCEPTUAL CONNECTION Explain why the return on equity for the airline and hotel chain is higher than for the distiller and jewelry retailer when their operating income and net income percentages are considerably smaller.arrow_forwardPlease take a look below at the two companies' financial ratios. Use the material your learned in the chapter to try and identify the industries these two companies operate in. You are going to be graded on the quality of your analysis and arguments (e.g. this ratio indicates that... and that ratio indicates the other,... and taken together these ratios indicate that.... (and so forth)) : Company A Company B P/E Ratio: 30 Price/Sales: 6 Price/Book Value of Equity: 7.5 Profit Margin: 20% Operating Margin: 25% Return on Assets (ROA): 6% Return On Equity (ROE): 25% Current Ratio: 3 P/E Ratio: 17 Price/Sales: 0.6 Price/Book Value of Equity: 3 Profit Margin: 3% Operating Margin: 5% Return on Assets (ROA): 7% Return On Equity (ROE): 15% Current Ratio: 1arrow_forwardInterpreting Ratios. In each of the following cases, explain briefly which of the two companies is likely to be characterized by the higher ratio. (O LO3) a. Debt-to-equity ratio: a shipping company or a computer software company b. Payout ratio: Food Producer Inc. or Computer Graphics Inc. c. Ratio of sales to assets: an integrated pulp and paper mill and manufacturer or a paper mill d. Average collection period: Regional Electric Power Company or. Z-Mart Discount Outletsarrow_forward
- Sargassum Caribbean Incorporated Balance Sheet as at December 31, 2020 Assets Liabilities Current Assets: Current Liabilities: Cash Accounts Payable 600,000 300,000 200,000 400,000 Notes Payable 900,000 1,500,000 Total Current Liabilities Accounts Receivable Inventory Total Current Assets 900,000 Fixed Assets: Long-Term Liabilities: Property, Plant & Equipment Less: Accumulated Depreciation 1,200,000 Long-Term Debt 1,000,000 Total Long Term Liabilities 200,000 300,000 300,000 Net Fixed Assets Owners' Equity: Common Stock ($1 Par) Capital Surplus Retained Earnings Total Owners' Equity 100,000 300,000 100,000 500,000 Total Assets 1,700,000 Total Liabilities & Owners' Equity 1,700,000 Sargassum Caribbean Incorporated Income Statement for Year Ending December 31, 2020 Sales 2,500,000 800,000 100,000 104,000 1,496,000 Less: Cost of Goods Sold Less: Administrative Expenses Less Depreciation Earnings Before Interest and Тахes Less: Interest Expense 20.000 1,476,000 663,000 813,000 417,000…arrow_forward1 Research a company you like to do business with. Look at the following ratios and complete an analysis of the company's performance. Your analysis should answer questions such as but not limited to: (1) is the company solvent (2) is the company highly leveraged (3) has the company been able to utilize their assets efficiently, etc. Ratios: Current Ratio Acid Ratio ROA ROE Debt-to-Equityarrow_forwardThe relationship between financial leverage and profitability Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms' financial leverage and profitability. a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other. (1) Debt ratio (2) Times interest earned ratio b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other. (1) Operating profit margin (2) Net profit margin (3) Return on total assets (4) Return on common equity c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberland's investors undertake when they choose to purchase its stock instead of Pelican's? a. The debt ratio for Pelican is %.…arrow_forward
- Company X is competing with company Y. These are their ratios: x y Current Ratio = .223 Current Ratio = .146 Cash Ratio = .057 Cash Ratio = .031 Quick Ratio = .105 Quick Ratio = .072 Based on liquidity and short term assets, which company is doing better?arrow_forward5. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'s income statement for the last two years. The company had assets of $4,700 million in the first year and $7,518 million in the second year. Common equity was equal to $2,500 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 2,540 2,000 1,610 1,495 127 80 1,737 803 80 723 181 542 Net Sales Operating costs except depreciation and…arrow_forwardThe 2024 income statement of Adrian Express reports sales of $20,310,000, cost of goods sold of $12,500,000, and net income of $1,900,000. Balance sheet information is provided in the following table. Assets Current assets: Cash Accounts receivable Inventory ADRIAN EXPRESS Balance Sheets December 31, 2024 and 2023 Long-term assets Total assets Liabilities and Stockholders' Equity Current liabilities Long-term Liabilities Common stock Retained earnings Total liabilities and stockholders' equity Industry averages for the following four risk ratios are as follows: Gross profit ratio Return on assets Profit margin Asset turnover Return on equity 45% 25% 15% 6.5 35% tines 2024 2023 $800,000 $910,000 1,725,000 1,175,000 2,175,000 1,625,000 5,000,000 4,390,000 $9,700,000 $8,100,000 $2,030,000 $1,820,000 2,490,000 2,560,000 2,025,000 1,975,000 3,155,000 1,745,000 $9,700,000 $8,100,000arrow_forward
- 1. Ratio Analysis (Formula Approach) Step 1: Quick Take: Ratio Analysis Ratio analysis is an important way of evaluating financial statements. Using ratios, instead of simply raw financial data, can help to make better comparisons of the strength of companies. There are many different kinds of ratios, which can be grouped into five general categories: 1. Liquidity ratios: These ratios are used to analyze whether or not a firm is able to pay its short-term debts (typically maturing within the next year). Good liquidity ratios are needed to continue operations of the firm. 2. Asset management ratios: These ratios are used to analyze the efficiency of asset use by a firm. Reasonable asset management ratios are required to sustain acceptable levels of net income. 3. Debt management ratios: These ratios analyze how a firm has financed its assets, as well as whether or not the firm can repay its long-term debt. 4. Profitability ratios: These ratios analyze how profitable a firm is. These…arrow_forwardAnalyze and compare the following firms financial ratio results. Which seems to be in a better financial position? Why? Ratio Firm A Firm B Debt-To-Equity 0.65 2.23 Current Ratio 1.74 0.83 Net Profit Margin 8.07% 9.59% Return On Equity 12.81% 47.17% -arrow_forwardCarson Electronics’ management has long viewed BGT Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheet and income statements for the two firms are as follows: Calculate the following ratios for both Carson and BGT: a) Debt ratio: b) Average collection period: c) Fixed asset turnover: d) Return on equity:arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781285065137Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...
Finance
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...
Finance
ISBN:9781285065137
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License