Attempts Do No Harm: 5 8. Analyzing ratios Aa Aa One of the most important appli
ID: 2330086 • Letter: A
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Attempts Do No Harm: 5 8. Analyzing ratios Aa Aa 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 relative to a single financial statement item (or base account or value) What is the most commonly used base item for a common size balance sheet? Total assets O Net sales Earnings before interest and taxes Net income Suppose you are conducting an analysis of the financial performance of Cold Goose Metal Works Inc. 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 3.20 4.16 4.66 Inventory turnover 6.40 7.68 8.60 Debt to equity 0.50 0.53 0.64 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. Cold Goose Metal Works Inc.'s ability to meet its debt obligations has worsened since its debt-to-equity ratio increased from 0.50 to 0.64 The market value of Cold Goose Metal Works Inc.'s common shares declined over the three years The company's creditworthiness has improved over these three years as evidenced by the increase in its debt-to-equity ratio over time An improvement in the inventory turnover ratio could likely be explained by the new sales-forecasting strategies that led to better inventory managementExplanation / Answer
Ability to meet debt obligation is indicated by Times interest earned and current ratio. Debt toequity ratio does not indicate the cash flow situation , hence it does not indicte ability tomeet debt obligations
Price to cash flow ratio has increased. If cash flow is constrant, the price would have increased. Hence market value of shares would have increased.
Increasing debt to equity ratio does not indicate increase in credit worthiness. The information on interest rate for the debt and the market rate are not available
Inventory turnover has increase. This indicates reduction of inventory innumber of days of consumption.In year one the inventory turnover ratio was 6.40. This means, number of days of inventory=365/6.4=57 days.
In year 3 , the inventory turnover ratio increased to 8.6. Number of days of inventory in year 3 was =365/8.6=42 days..
The improvement could be explained by better sales forecasting that led to better inventory management.
Answer:
Animprovement in the inventory turnover ratio could likely be explained by the new sales forecasting strategies that led tobetter inventory management
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