Chapter 5, Problem 5.4BYP

(a)

To determine

Interpreting Financial Statements

The study of financial statements and analyzing of financial position of a company to understand the financial health of a company and to take efficient economic decision may be termed as financial statement analysis. It gives an idea to the investors, the owners about the company and its competitors, respectively.

In the given case, two large retail French companies, Company C and Company P have merged to compete against a giant retail American company, Company W. The international sales of Company W are much less than that of combined sales of Company C and P, however the total sales of Company W are more than combines sales of the two merged companies.

To Calculate: The gross profit rate for each of the company and discuss their relative abilities to control cost of goods sold.

(b)

To determine

To Calculate: The profit margin for each of the company and discuss their relative profitability.

(c)

To determine

Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. It is calculated by using the following formula:

$\text{Current ratio}=\frac{\text{Current assets}}{\text{Current}\text{liabilities}}$

Debt to asset ratio is used by the company to determine how well the company is able to survive the losses without damaging the creditors’ interest. It is determined by dividing total debt and total assets. It is calculated by using the following formula:

$\text{Debt to assets}\text{ratio}\}\text{=}\frac{\text{Total debt}}{\text{Total assets}}$

To calculate: The current ratio and debt asset ratio of each company.

(d)

To determine

To Analyze: The above comparison.