Reading 42: Financial Statement Analysis: Applications-LOS a 2011, company, center, style, label

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Session 10: Financial Reporting and Analysis: Applications and International Standards Convergence
Reading 42: Financial Statement Analysis: Applications

LOS a: Evaluate a company’s past financial performance and explain how a company’s strategy is reflected in past financial performance.

 

 

National Scooter Company and Continental Chopper Company are motorcycle manufacturing companies. National’s target market includes consumers that are switching to motorcycles because of the high cost of operating automobiles and they compete on price with other manufacturers. The average age of National’s customers is 24 years.

Continental manufactures premium motorcycles and aftermarket accessories and competes on the basis of quality and innovative design. Continental is in the third year of a five-year project to develop a customized hybrid motorcycle. Which of the two firms would most likely report higher gross profit margin, and which firm would most likely report higher operating expense stated as a percentage of total cost?

Higher gross profit margin

Higher percentage operating expense

A) Continental National

B) National Continental

C) Continental Continental

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Continental likely has the highest gross profit margin percentage since it is selling a customized product and does not compete primarily based on price. Because of the research and development costs of developing a new hybrid motorcycle, Continental likely has the higher operating expense stated as a percentage of total cost.

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According to the Management Discussion and Analysis section of Frankfurt Supply Company’s annual report, Frankfurt recently decreased the sales prices of its products in order to increase market share. In addition, Frankfurt recently lowered its requirements for credit customers and increased the credit limits of some customers. What is the most likely impact on Frankfurt’s accounts receivable turnover and inventory turnover as a result of these changes?

A) Only one will decrease.

B) Both will decrease.

C) Both will increase.

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Accounts receivable turnover will likely decrease as a result of offering credit to customers with weak credit histories. Collections will likely slow down and bad debt expense will likely increase. Inventory turnover is likely to increase as sales of Frankfurt’s products increase from more liberal credit terms and the decrease in price.