Problem No.4 Business A and Business B are both engaged in retailing but seem to take a different approach to this trade according to the information available. The information con- sists of a table of ratios, shown as Table 7.10. Table 7.10 Financial ratios for companies A and B Ratio Business A Current ratio 2:1 Quick assets (acid test) ratio 1.7:1 20 per cent Return on capital employed (ROCE) Return on owner's equity (ROE) 30 per cent Debtors collection Creditors payment 63 days 50 days Gross profit percentage Net profit percentage Inventory turnover 40 per cent 10 per cent 52 days Business B 15:1 0.7:1 per cent 17 18 per cent 21 days 45 days 15 per cent 10 per cent 25 days Required: (a) Explain briefly how each ratio is calculated. (b) Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal service and one of them on competitive prices, which do you think is which, and why?
Problem No.4 Business A and Business B are both engaged in retailing but seem to take a different approach to this trade according to the information available. The information con- sists of a table of ratios, shown as Table 7.10. Table 7.10 Financial ratios for companies A and B Ratio Business A Current ratio 2:1 Quick assets (acid test) ratio 1.7:1 20 per cent Return on capital employed (ROCE) Return on owner's equity (ROE) 30 per cent Debtors collection Creditors payment 63 days 50 days Gross profit percentage Net profit percentage Inventory turnover 40 per cent 10 per cent 52 days Business B 15:1 0.7:1 per cent 17 18 per cent 21 days 45 days 15 per cent 10 per cent 25 days Required: (a) Explain briefly how each ratio is calculated. (b) Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal service and one of them on competitive prices, which do you think is which, and why?
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter13: Financial Statement Analysis
Section: Chapter Questions
Problem 13.3DC: Comparing Two Companies in the Same Industry: Chipotle and Panera Bread This case should be...
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