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 tocompare 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?O Earnings before interest and taxesONet salesONet incomeO Total assetsSuppose you are conducting an analysis of the financial performance of Cute Camel Woodcraft Company 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 somenew forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptionsbased on the information available, and calculated the following ratios.Price-to-cash-flowInventory turnoverDebt-to-equityRatios CalculatedYear 16.6013.200.50Year 2 Year 34.623.7010.568.450.400.32Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysisreport? Check all that apply.O A decline in the debt-to-equity ratio implies a decline in the creditworthiness of the firm.A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicateorders placed to vendors.O Cute Camel Woodcraft Company's ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.50 to0.32.O 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.

Answered: One of the most important applications…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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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?
O Earnings before interest and taxes
ONet sales
ONet income
O Total assets
Suppose you are conducting an analysis of the financial performance of Cute Camel Woodcraft Company 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.
Price-to-cash-flow
Inventory turnover
Debt-to-equity
Ratios Calculated
Year 1
6.60
13.20
0.50
Year 2 Year 3
4.62
3.70
10.56
8.45
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.
O A decline in the debt-to-equity ratio implies a decline in the creditworthiness of the firm.
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.
O Cute Camel Woodcraft Company's ability to meet its debt obligations has improved since its debt-to-equity ratio decreased from 0.50 to
0.32.
O 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.

Expert Solution

Step 1: what is a balance sheet and it's components

A common size balance sheet is a financial statement presentation format that expresses each line item as a percentage of total assets. It standardizes the balance sheet, making it easier to analyze and compare the financial structure of a company over time or with peers. The basic components of a common size balance sheet include current assets (e.g., cash, accounts receivable), non-current assets (e.g., property, plant, equipment), current liabilities (e.g., accounts payable), non-current liabilities (e.g., long-term debt), and shareholders' equity (e.g., common stock, retained earnings). Each of these components is expressed as a percentage of the total assets, providing insights into the company's asset composition and financial health.

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