Graded Assignment Attempts: Keep the Highest:I5 10. Analyzing ratios One of the

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Graded Assignment Attempts: Keep the Highest:I5 10. Analyzing ratios 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 comperative 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? O Earnings before interest and taxes O Net sales O Total assets O Net income Suppose you are conducting an analysis of the financial performance of Cold Goose Metal Works Inc. over the past thre 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 available, and calculated the following ratios Ratios Calculated Year 1 Year 2 Year 3 Price to cash flow 2.00 1.40 1.12 Inventory turnover 4.00 3.20 2.56 Debt to equity the information 0.50 0.40 0.32 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 D A decline in the inventory turnover ratio can be explained by the new inventory management system that the company recently adopted, which led to more efficient inventory management. A decline in the debt-to-equity ratio implies a decline in the creditworthiness of the firm. Cold Goose Metal Works Inc.'s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.50 to 0.32. A plausible reason why Cold Goose Metal Works Inc.'s price-to-cash-flow ratio has decreased is that investors expect lower cash flow per share in the future.

Explanation / Answer

The most common base item is total assets. All the rest are part of the Profit and loss account.

An anaylsis of the financial ratios of the company, we can conclude the following :

1. The company had tested some new forecasting strategies for better operation management, and by the new inventory management system, we can see a decline in the inventory turnover ratio which has led to more efficient inventory management. Overstocking means that cash is being tied up in inventory assets for a prolonged period. Since the ratio has come down, it is good for the company - TRUE

2. A decline in debt to equity ratio implies a decline in the creditworthiness of the firm - FALSE

3. The debt-to-equity ratio is a measure of a company's financial leverage that relates the amount of a firms' debt financing to the amount of equity financing. Cold Goose Works ability to meet its debt obligations has improved since its D/E ratio has decreased from 0.5 to 0.32. This also means that the company is using less debt and more of equity - TRUE

4. A decease in the price to cash flow ratio indicates that the investors expect the higher cash flow per share in the future. - FALSE

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