What is the most commonly used base item for a common size income statement? O S

Question

What is the most commonly used base item for a common size income statement? O Stockholders' equity O Total assets O Total liabilities O Net sales Suppose you are conducting an analysis of the financial perfórmance 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 Ratios Calculated Year 1 Year 2 Year 3 Price to cash flow 3.60 2.52 2.02 Inventory turnover 7.20 5.764.61 Debt to equity 0.70 0.56 0.45 available, and calculated the following ratios. 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. A decline in the debt-to-equity ratio implies a decline in the creditworthiness of the firm. 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 Cold Goose Metal Works Inc.'s ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.70 to 0.45. A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors.

Explanation / Answer

Common size income statement is used to analyze trends and evaluate the various items on the income statement as a basis of net sales.

Hence, correct option is “Net sales”

Debt equity ratio should be as low as possible to decrease the default risk and interest payment risk. Lower the ratio, higher the safety to common stockholders.

Hence, correct option is “Cold Goose Metal Works Inc.’s ability to meet its debt obligation has improved since its debt-to-equity ratio decreased from 0.70 to 0.45.”

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