EBK FINANCIAL REPORTING, FINANCIAL STAT
8th Edition
ISBN: 9781337003193
Author: WAHLEN
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Textbook Question
Chapter 4, Problem 1QE
Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?
Expert Solution & Answer
To determine
Discuss the shortcomings in comparison of two different firms using common-size analysis.
Explanation of Solution
Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.
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Students have asked these similar questions
To evaluate a company’s performance, investors need a benchmark to which they can compare its financial ratios. What are some of the problems associated with these comparisons?
Which of the following statements regarding the current ratio is true?
a.The current ratio is more useful than working capital in making comparisons across companies.
b.The current ratio is not useful in making comparisons with industry averages.
c.Working capital is more useful than the current ratio in making comparisons across companies.
d.All of these statements are true.
Which is not a potential problem of utilizing ratio analysis?
A. trends and industry averages are historical in nature.
B. financial data may be distorted due to price-level changes.
C. firms within an industry may not use similar accounting methods.
D. all of the above
E. answer not given
Chapter 4 Solutions
EBK FINANCIAL REPORTING, FINANCIAL STAT
Ch. 4 - Common-Size Analysis. Common-size analysis is a...Ch. 4 - Earnings per Share. Firm A reports an increase in...Ch. 4 - Prob. 3QECh. 4 - Profit Margin for ROA versus ROCE. Describe the...Ch. 4 - Concept and Measurement of Financial Leverage....Ch. 4 - Advantages of Financial Leverage. A company...Ch. 4 - Prob. 7QECh. 4 - Nucor, a steel manufacturer, reported net income...Ch. 4 - Phillips-Van Heusen, an apparel manufacturer,...Ch. 4 - TJX, Inc., an apparel retailer, reported net...
Ch. 4 - Boston Scientific, a medical device manufacturer,...Ch. 4 - Valero Energy, a petroleum company, reported net...Ch. 4 - Exhibit 4.22 presents selected operating data for...Ch. 4 - Microsoft Corporation (Microsoft) and Oracle...Ch. 4 - Prob. 17PCCh. 4 - Prob. 18PCCh. 4 - Texas Instruments (TI) designs and manufactures...Ch. 4 - JCPenney operates a chain of retail department...Ch. 4 - Prob. 21PCCh. 4 - Selected data for General Mills for 2007, 2008,...Ch. 4 - Prob. 23PCCh. 4 - Hasbro is a leading firm in the toy, game, and...Ch. 4 - Fitch sells casual apparel and personal care...Ch. 4 - Prob. 26PCCh. 4 - Starwood Hotels (Starwood) owns and operates many...Ch. 4 - Select data for Avis and Hertz for 2012 follow....Ch. 4 - Integrative Case 1.1 introduced the industry...Ch. 4 - Prob. 1ABICCh. 4 - Prob. 1ACICCh. 4 - Prob. 1BAICCh. 4 - Prob. 1BBICCh. 4 - Walmart and Carrefour follow similar strategies....Ch. 4 - Walmart and Carrefour follow similar strategies....
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?arrow_forwardWhen you are interpreting financial ratios, it is useful to compare a company's ratios to some form of standard. Group of answer choices True Falsearrow_forwardNo single ratio can predict the success or Failure of a company. What different types of Ratios are necessary for financial analysis? How is the Return on Assets (ROA) Ratio Calculated?arrow_forward
- Explain the Limitations of Financial Ratios in Business Decisions?arrow_forwardExplain why balance sheet accounts are generally “averaged” and income statement figures are just lifted from the income statement when using them as factors in a particular financial statement ratio? How do the DuPont technique helps the firm’s managers to further analyze its returns?arrow_forwardWhat is the value of common-sizing analysis? Why would a company do such an analysis on another company’s financial statements?arrow_forward
- What is the usefulness of using Ratio analysis in financial reporting? What is industry average? How it benefits?arrow_forwardWhat are the limitations to using financial ratio analysis [such as profitability ratios, liquidity ratios, gearing ratios, and investment ratios] computed from the financial statements of a company. What other alternatives could have been used to decide on the performance and investment-worthiness of a company.arrow_forwardPlease see the attached graph for questions below. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? Are there economic or end-market influences that explain why the ratios differ? What might they be? Over time, is each company’s overall financial performance improving, declining, or is something strange going on? Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis?arrow_forward
- In regards to benchmarking, which of the following statements is incorrect? A. Benchmarking is the practice of comparing a company with other leading companies. B. The two main types of benchmarks in financial statement analysis include benchmarking against the industry average and benchmarking against a key competitor. C.The industry average is not a useful benchmark for evaluating a company. D. Providing commonminus−size percentages in a graphical manner highlights differencesarrow_forwardWhich of the following is not one of the typical uses of financial ratios? a. Comparisons to a company’s historic values b. Comparison to benchmarksc. Comparison to competitors’ values d. Comparison to zero with positive values indicating desirable ratios and negative values indicating undesirable ratios.arrow_forwardIn comparing the current ratios of two companies, why is it invalid to assume that the company with the higher current ratio is the better company? a. The two companies may be different sizes. b. A high current ratio may indicate inadequate inventory on hand. c. The two companies may define working capital in different terms. d. A high current ratio may indicate inefficient use of various assets and liabilities. could you explain this questionarrow_forward
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