18) The managerial accountant at Company A, a small retailer, reviews info Compa
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18) The managerial accountant at Company A, a small retailer, reviews info Company B, a large national firm. Review the following information listed below about Company A and Company B: Company A Income Statement: Vertical Analysis Company A Company B 3760% I 2s.sok | 100% 28,80% 12.70% Sales revenues 100% Less: Cost of goods sold Gross profit 19.40% 1.98% Operating income Less: Interest expense Income before income taxes Less: Income tax expense Net income 60 11.10% | 17.42% 340% 2.98% 8.12% 1402% Why does the managerial accountant at Company A review the income statement at Company B? What is the name of this statement? Which company is most profitable? Why? Discuss the value of Trend Analysis of financial statement data. Why are comparisons to select competitors and Industry Averages meaningful/valuable to Management of a company (particularly in carrying its key responsibilities of planning, directing, controlling, and decision- making)?Explanation / Answer
The managerial accountant of company A reviews the income statement of company B in order to evaluate the performance of his company with that of it's peers in the industry. This type of analysis with the peers helps in analysing the strength and weakness of the company with that of its competitors.
The name of this statement is Common Size Income Statement.
Company A is most profitable as the profit margin on sales is more than that of Company B. Company A's Gross Profits Margin as well as Net Profit margin is more than that of its competitor Company B.
Trend analysis of financial statement data is very valuable to a company as it helps in determining where the company is going over time. Positive trend shows that the company is growing on a positive note, while negative trend reveals that there may be flaw somewhere which the company is not able to cope up with.
Comparisons to select competitors and industry averages meaningful/ valuable to management of a company because it helps in setting standards with which the own performance can be compared. Without the figures of the industry or that of the competitor, there will be only a vague figure to compare its actual performance.
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