Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?

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Answer 1

Textbook Question

Chapter 4, Problem 1QE

Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?

Expert Solution & Answer

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

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Students have asked these similar questions

Which of the following statements regarding the current ratio is true? a.The current ratio is more useful than working capital in making comparisons across companies. b.The current ratio is not useful in making comparisons with industry averages. c.Working capital is more useful than the current ratio in making comparisons across companies. d.All of these statements are true.

Please see the attached graph for questions below. What is the difference between the two companies on this ratio? What is a plausible explanation as to why they would differ? Is one company clearly different than the other? Are there economic or end-market influences that explain why the ratios differ? What might they be? Over time, is each company’s overall financial performance improving, declining, or is something strange going on? Do you think evaluating financial statements is a good idea? What do you regard as some of the shortcomings of financial ratio analysis?

Which of the following is a basic limitation associated with ratio analysis The usefulness of a single ratio by itself. The lack of comparability among firms in a given industry. The use of fair value accounting costs. The use of future-oriented data items in accounting.

Answer 2

Textbook Question

Chapter 4, Problem 1QE

Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?

Expert Solution & Answer

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

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Answer 3

Textbook Question

Chapter 4, Problem 1QE

Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?

Expert Solution & Answer

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

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Answer 4

Textbook Question

Chapter 4, Problem 1QE

Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?

Expert Solution & Answer

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

Answer 8

Expert Solution & Answer

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

Answer 9

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Answer 10

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Answer 11

To determine

Discuss the shortcomings in comparison of two different firms using common-size analysis.

Answer 12

Explanation of Solution

Common-size analysis computes the items of income statement as a percentage of sales and amount of balance sheet as percentage of total assets. The shortcoming of this analysis is that different firms have different policies and methods of production. The categorization of expenses is done on the basis of business activity of the business activities. Thus, it becomes difficult to compare two different firms.

Answer 13

Ch. 4 - Common-Size Analysis. Common-size analysis is a...Ch. 4 - Earnings per Share. Firm A reports an increase in...Ch. 4 - Prob. 3QE Ch. 4 - Profit Margin for ROA versus ROCE. Describe the...Ch. 4 - Concept and Measurement of Financial Leverage....Ch. 4 - Advantages of Financial Leverage. A company...Ch. 4 - Prob. 7QE Ch. 4 - Nucor, a steel manufacturer, reported net income...Ch. 4 - Phillips-Van Heusen, an apparel manufacturer,...Ch. 4 - TJX, Inc., an apparel retailer, reported net...

Common-Size Analysis. Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?

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