7.30
continued.
7.30
continued.
reduce the selling and administrative expense to sales percentage.
b. The decreased total assets turnover in 2013 results from
declines in the accounts receivable, inventory, and fixed
c. The slower accounts receivable and inventory turnovers
should have led to an increase in these current assets. A
decline in the current ratio likely therefore occurs because of
d. The two cash flow ratios declined between 2011 and
2012 and increased between 2012 and 2013. The debt ratios
indicate that both total debt and long-term debt decreased
Solutions7-34
7.29 (Scantania; interpreting profitability and risk ratios.)
a. The increase in the profit margin results from decreases in the
7.30
fixed costs over a larger sales base. Investment and net
b. Economies of scale (see the discussion in Part a. above)
explains the decreased cost of goods sold to sales percentage
but not the increasing inventory turnover. Any benefits from
economies of scale afect both the numerator and
c. The growth rate in sales in 2013 was higher than in 2011 and
2012.
Perhaps Scantania had geared its productive capacity for 2013
d. Scantania must have experienced increases in cash,
e. Cash flow from operations likely increased as a result of the
increase in the accounts receivable and inventory turnovers
7-35 Solutions
f. The increase in the accounts receivable and inventory
turnovers moderated the increase in current assets for these
7.30
continued.
two items, thereby afecting the numerator of these ratios.
The firm might have sold marketable securities and used the
7.30 (Detective analysis—identify company.)
There are various approaches to this exercise. One approach
begins with a particular company, identifies unique financial
characteristics (for example, steel companies have a high
Firm (12)—The high proportions of cash, marketable securities,
and receivables for Firm (12) suggest that it is Fortis, the Dutch
insurance and banking company. Insurance companies receive
cash from premiums each year and invest the funds in various
investment vehicles until needed to pay insurance claims. They
Solutions7-36
7.30
continued.
The ultimate cost of claims will not be known with certainty until
customers make claims and the firm makes settlements. Prior
to that time, Fortis must estimate what that cost will be. The
need to make such estimates creates the opportunity to manage
Firms (2), (3), (5), and (9)—There are four firms with research
and development (R&D) expenses, (2), (3), (5) and (9). These
are likely to be Nestlé, Roche Holding, Sun Microsystems, and
Toyota Motor in some combination.
7.30
continued.
long-term debt in
7-37Solutions
its capital structure. Computer products have short product life
cycles. Lenders are reluctant to lend for a long period because of
the concern for technological obsolescence. Computer companies
that outsource their production also have few assets that can
serve as collateral for long-term borrowing.
7.30
continued.
reduce the selling and administrative expense to sales percentage.
b. The decreased total assets turnover in 2013 results from
declines in the accounts receivable, inventory, and fixed
c. The slower accounts receivable and inventory turnovers
should have led to an increase in these current assets. A
decline in the current ratio likely therefore occurs because of
d. The two cash flow ratios declined between 2011 and
2012 and increased between 2012 and 2013. The debt ratios
indicate that both total debt and long-term debt decreased
Solutions7-34
7.29 (Scantania; interpreting profitability and risk ratios.)
a. The increase in the profit margin results from decreases in the
7.30
fixed costs over a larger sales base. Investment and net
b. Economies of scale (see the discussion in Part a. above)
explains the decreased cost of goods sold to sales percentage
but not the increasing inventory turnover. Any benefits from
economies of scale afect both the numerator and
c. The growth rate in sales in 2013 was higher than in 2011 and
2012.
Perhaps Scantania had geared its productive capacity for 2013
d. Scantania must have experienced increases in cash,
e. Cash flow from operations likely increased as a result of the
increase in the accounts receivable and inventory turnovers
7-35 Solutions
f. The increase in the accounts receivable and inventory
turnovers moderated the increase in current assets for these
7.30
continued.
two items, thereby afecting the numerator of these ratios.
The firm might have sold marketable securities and used the
7.30 (Detective analysis—identify company.)
There are various approaches to this exercise. One approach
begins with a particular company, identifies unique financial
characteristics (for example, steel companies have a high
Firm (12)—The high proportions of cash, marketable securities,
and receivables for Firm (12) suggest that it is Fortis, the Dutch
insurance and banking company. Insurance companies receive
cash from premiums each year and invest the funds in various
investment vehicles until needed to pay insurance claims. They
Solutions7-36
7.30
continued.
The ultimate cost of claims will not be known with certainty until
customers make claims and the firm makes settlements. Prior
to that time, Fortis must estimate what that cost will be. The
need to make such estimates creates the opportunity to manage
Firms (2), (3), (5), and (9)—There are four firms with research
and development (R&D) expenses, (2), (3), (5) and (9). These
are likely to be Nestlé, Roche Holding, Sun Microsystems, and
Toyota Motor in some combination.
7.30
continued.
long-term debt in
7-37Solutions
its capital structure. Computer products have short product life
cycles. Lenders are reluctant to lend for a long period because of
the concern for technological obsolescence. Computer companies
that outsource their production also have few assets that can
serve as collateral for long-term borrowing.