Common-size financial statements are particularly useful when comparing data
from different companies.
For example: In 2002, Wendys net income was $219 million, whereas
McDonalds was $894 million. This comparison is misleading because of the
Cruisers has the following direct labor standard to manufacture one boat hull: 26
standard hours per hull at $12.80 per direct labor hour. Last month, 2,540 direct
labor hours were worked at a total labor cost of $32,893 to make 100 hulls.
A flexible budget is prepared for the same activity level as actually achieved to
compare the budgeted costs and actual results at the same level of activity.
Favorable and unfavorable variances are calculated by subtracting actual results
The decision-making process begins with strategic, operational, and financial
planning. Implementing the plans and executing operational activities provide
performance data. After the data are collected, performance is analyzed; and the
The inventory turnover is computed as shown.
It measures how many times a companys inventory has been sold and replaced
during the year.
It should increase for companies that adopt just-in-time methods.
It should be interpreted relative to a com
The current ratio is computed as shown.
It measures the company's ability to pay its short-term debt.
It must be interpreted with care. For example, a declining ratio may be a sign of
deteriorating financial condition, or it may be the result of
In previous chapters, we have calculated the financial leverage at a company.
We will not calculate it again. Financial leverage results from the difference
between the rate of return the company earns on investments in its own assets
and the ra
o To determine the dividend yield ratio, we divide the dividends per share by
the closing market price per share of the companys common stock. Once
again, if you are an investor who requires current income you will want to
look for common
The first ratio we will calculate is earnings per share. Earnings per share is equal
to net income less preferred stock dividends, divided by the average number of
common shares outstanding. The numerator of the equation is sometimes
A budget variance results from paying more or less than expected for overhead
items. A volume variance results from operating at an activity level different from
the planned activity.
A volume variance results when standard hours allowed for act