Consider the following selected accounting ratios and accounting data. Both firms are in the same industry. In
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Question:
Consider the following selected accounting ratios and accounting data. Both firms are in the same industry. In all cases explain why. Answers with just a letter or a correct letter and an incorrect explanation will not receive partial credit.
Ratio | Firm A | Firm B |
Debt Ratio | 0.5 | 0.2 |
Time Interest Earned Ratio | 10 | 20 |
Current Ratio | 0.5 | 2 |
Quick Ratio | 0.75 | 1.5 |
Inventory Turnover (mrq) | 12 | 3 |
Total Asset Turnover | 1 | 0.5 |
Accounts receivable turnover | 6 | 8 |
Profit Margin on Sales | 0.2 | |
Return on Total Assets | 0.2 | 0.22 |
Return on Common Equity | | |
Price/Earnings Ratio | | 20 |
Owner Equity | $3M | $5M |
(a) Which of the ratios is mathematically impossible given the definitions?
(b) Which firm would a lender prefer?
(c) Who is more likely to be able to fulfill a relatively large one-time order?
(d) What are the total assets of each of the two firms?
Related Book For
Management and Cost Accounting
ISBN: 978-1405888202
4th edition
Authors: Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, George Foster
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