Analysis on Gm Financial Statement Essay

3752 Words Apr 12th, 2014 16 Pages
CHapter 13
FINANCIAL STATEMENT ANALYSIS

Changes from Twelfth Edition

Updated from Twelfth Edition. Porter Lumber, Inc. has been updated and renamed Butler Lumber. The Sears Roebuck vs. Wal-Mart and Quality Furniture Company cases have been dropped.

Approach

Although it is not possible to do this precisely, the financial statement analysis discussion is more coherent, we believe, if it is built around Illustration 13-1. The theme is that the financial statement proxy for shareholder value is return on investment, and the ratios help explain why a given return was not satisfactory (if it was not), or at least identify the areas that need investigation.

As with Chapter 8, the amount of attention given to this chapter
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Butler Lumber Company, Inc. involves the process of seeking bank credit to prepare proforma financial statements using financial ratios.

Problems

Problem 13-1

a. Profit Margins

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N has the higher profit margin.

b. Investment Turnover

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M has the higher investment turnover.

c. Return on Investment

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Both firms have similar returns on investments. Based on this investment criterion, the investments are equally attractive.

Problem 13-2

Since the division has no control over the financing of its assets employed in its operation, the most appropriate measure of return on investment to use to judge its performance is

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= .123 (12.3 percent).

Problem 13-3

Current Year

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= 24 days

Preceeding Year

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= 22.4 days

The new controller holds more cash relative to the company’s cash expenses than did the old controller. The higher level may be safer (i.e. less chance of not meeting payments when due), but what is its cost? If the cash balance is excessive, the excess is a low-return use of cash compared to investing it in higher return assets.

Problem 13-4

Current Year

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= 39

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