Use and Interpretation of Financial Measurements
Shown Below Are Various

question 11

Essay

Use and interpretation of financial measurements
Shown below are various financial measurements for two companies which are similar in size and sell similar products:
Instructions: You are to enter code letters in the spaces provided in the two right-hand columns.
In the first column, indicate which of the following three groups probably would be most interested in the specified financial measurement. Identify one group, using the following code letters: STC = indicating short-term creditors, LTC = indicating long-term creditors, and S = indicating stockholders.
In the second column, enter an X or a Y to indicate whether your "most interested group" would prefer the measurement results reported by Co. X or Co. Y.
Consider each financial measurement independently of the others.
$$\begin{array} { | l | l | c | c | c | c | } \hline & { \text { Financial Measurement } } & \text { Co. X } & \text { Co. Y } & \begin{array} { c } \text { Most } \\\text { Interested } \\\text { Group }\end{array} & \begin{array} { c } \text { Most } \\\text { Favorable } \\\text { Result }\end{array} \\\hline \text { (a) } & \text { Accounts receivable turnover } & 5 & 8 & & \\\hline \text { (b) } & \begin{array} { l } \text { Equity ratio (assume for both } \\\text { companies the return on assets } \\\text { is } 10 \% \text { and the rate of interest } \\\text { paid to creditors is } 11 \%\end{array} & 40\%&60\% & & \\\hline \text { (c) } & \text { Operating cycle } & 54 \text { days } & 218 \text { days } & & \\\hline \text { (d) } & \begin{array} { l } \text { Percentage change in net } \\\text { income }\end{array} & + 6 \% & - 12 \% & & \\\hline \text { (e) } & \text { Interest coverage ratio } & 11 & 3 & & \\\hline\end{array}$$

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Definitions:

Government Subsidies

Financial support provided by the government to individuals, businesses, or industries to encourage certain activities or reduce their costs.

Conventional Energy

Energy sources that are widely used and accepted, typically fossil fuels like coal, oil, and natural gas, as opposed to renewable energy sources.

Alternative Energy Sources

Energy sources that are an alternative to traditional fossil fuels, such as solar, wind, hydro, and geothermal power.

Price Of Oil

The cost per barrel of crude oil as determined by global markets, influenced by factors such as supply, demand, geopolitical events, and economic indicators.