Use and Interpretation of Financial Measurements
Shown Below Are Various

question 107

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: $$\begin{array} { | l | l | c | c | c | c | } \hline & & && \text { Most } & \text { Most } \\\hline & \text { Financial } & & & \text { Interest } & \text { Favorable } \\\hline & \text { Measurement } & \text { Co. X } & \text { Co. Y } & \text { Group } & \text { Result } \\\hline \text { (a) } & \text { Accounts receivable turnover } & 5 & 8 & - &- \\\hline \text { (b) } & \begin{array} { l } \text { Equity ratio (assume for both } \\\text { companies the return on assets } \\\text { is } 10 \% \text { and the rate of interest } \\\text { paid to creditors is } 11 \%\end{array} & 40 \% & 60 \% & - & - \\\hline \text { (c) } & \text { Operating cycle } & 54 \text { days } & 218 \text { days } &- &- \\\hline \text { (d) } & \begin{array} { l } \text { Percentage change in net } \\\text { income }\end{array} & + 6 \% & - 12 \% & - & -\\\hline \text { (e) } & \text { Interest coverage ratio } & 11 & 3 & - &- \\\hline\end{array}$$ 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 shareholders.
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.

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Definitions:

Less Restrictive Financing

Financing options that offer more flexible terms and conditions, often resulting in higher levels of debt that can be used by a company for expansion or other purposes.

Leasing

An agreement where one party pays another for the use of an asset over a set period, often used for equipment, vehicles, or property, without provided ownership.

Building

A structure with a roof and walls, such as a house or factory, constructed as a dwelling or for a business or other use.

Rawhide Tanning

The process of treating raw hides and skins with chemical solutions to produce leather.