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:

Buggy Whips

A product or service that has become obsolete due to technological advancements or changes in consumer preferences.

Demand

The interest and capacity of buyers to acquire a product or service for a certain cost.

Human Capital

The abilities, understanding, and expertise held by a person or a group, considered in terms of their economic or value worth to a company or nation.

Ph.D.

A Doctor of Philosophy degree, a postgraduate academic degree awarded by universities.