Acc501 - Case 1 Essays

1528 Words Apr 22nd, 2013 7 Pages
Trident University International
ACC501: Introduction to Financial Accounting
Module 1 Case Assignment

For investors to objectively analyze and rate companies they need to have access to certain financial information in order to make informed business decisions. Key financial figures such as Statement of Income, Balance Sheet Statements, and Cash Flow Statements are used to make these comparisons. To ensure that companies are reporting the same financial information several accounting and auditing standards have been created and must be followed. In the follow paper two companies, Abercrombie and Fitch and Hennes & Mauritz, will be evaluated based on their financial statements in a goal to determine which company is more
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Common Size Ratios Common size rations are important because they show a percentage for each line item on the statement of income or the balance sheet. This information helps to convert the financial information from raw numbers into usable information that can be compared from period-to-period or used to compare against competitors in the same industry (Lowe, 2000). The two common size ratios that I utilized were the Gross Profit Margin and the Net Profit Margin. The formulas are outlined below:
Gross Profit Margin = Gross Profit / Sales x 100
Net Profit Margin = Net Profit / Sales x 100
After doing the math H&M’s Gross Profit Margin for 2011 was 60.1% while the Net Profit Margin was 14.4%. This indicates that H&M was able to make 14.4 cents for every $1 after all other expenses are factored in. In contrast, A&F’s Gross Profit Margin for 2011 was 60.6% while the Net Profit Margin was 3.15%. This indicates that even though A&F generated slightly more gross profit it had more operating expenses and liabilities that resulted in significantly less net profit when compared to H&M.
Liquidity Ratio A liquidity ratio is used to measure a company’s ability to repay its debts and is a good indicator of the solvency of the business. The liquidity ratio that was used is the Current Ratio and is

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