Financial Analysis Suppose You Are Comparing Two Other

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Financial Analysis

Suppose you are comparing two firms within an industry. One is large and the other is small. Will relative or absolute numbers be of more value in each case? What kinds of statistics can help evaluate relative size?

Gibson, Charles H. (2012-05-10). Financial Reporting and Analysis (Page 217). Cengage Textbook. Kindle Edition.

When comparing two firms that are unequal in size, the relative financial ratios are more appropriate for any type of comparison. The advantage of using ratios is that they represent a metric that can be easily compared with industry standards or other specific companies of different sizes. The financial statement represents a snap shot of a company's performance over a given time period and the financial information that these reports provide can allow the analysis of a wide range of different ratios. These ratios can provide insights to factors such as the company's ability to repay short- and long-term liabilities, information about the debt structure, and information about the capital structure that the company is operating with along with various profitability metrics.

Chapter 6

Problem 6-11

Q 6-11 List the two computations that are used to determine the liquidity of inventory.

Gibson, Charles H. (2012-05-10). Financial Reporting and Analysis (Page 249). Cengage Textbook. Kindle Edition.

The operating cycle for a company is the time period between the acquisition of goods and the final cash realization resulting from sales and subsequent collections.

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Inventory Turnover

Inventory turnover indicates the liquidity of the inventory. This computation is similar to the accounts receivable turnover computation.

The inventory turnover formula follows:

Inventory Turnover = Cost of Goods Sold / Average Inventory

Operating Cycle

The operating cycle represents the period of time that elapses between the acquisition of goods and the final cash realization resulting from sales and subsequent collections. An approximation of the operating cycle can be determined from the receivables liquidity figures and the inventory liquidity figures. Compute the operating cycle as follows:

Operating Cycle = Accounts Receivable Turnover in Days + Inventory Turnover in Days

Problem 6-15

If a company has substantial cash sales and credit sales, is there any meaning to the receivable liquidity computations that are based on gross sales?

Yes. Any computations that use gross sales as a metric can give an insight to the company's total sales volume and general performance. However, other liquidity metrics such as the operating cycle which considers credit collection times can give a more accurate account of the company's current asset and liabilities position.

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Liquidity of short-term assets

Walmart

Jan 31, 2015

Jan 31, 2014….....

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