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Accounting: Common Size Analysis

Please take a look at both attachments and let me know if I answered the questions correctly. Also, I'm having trouble making a common-size balance sheet and income statement using this information. Please point me in the right direction and example how I'm supposed to complete both financial statements. Thanks

Also, the directions say 2012 but it's supposed to say 2011.

Short-term credit risk analysis:
Birdy appears to be in a stronger short-term financial position. Its current and acid-test ratios are much better than Bogey's. Birdy is also turning its inventory over faster. Their one area of concern is accounts receivable collection which is a little slower than Bogey's, possibly due to the increased sales.

Business analysis:
Bogey is heavily leveraged with debt financing. Their larger interest expense yields a lower profit margin and return on assets then Birdy. Last year Bogey's risk taking paid off as they were able to cover their interest payments and return 38.6% to the stockholders. If an individual was looking at these two companies as an investment he/she might gamble on Bogey. This is not the case. An investor needs a company that can survive economic fluctuations. Birdy would be a better choice.

1. Prepare common-size 2012 balance sheets for each company.

2. Prepare common-size 2012 income statements for each company.

3. For both companies compute the (a) current ratio, (b) acid-test ratio, (c) accounts
receivable turnover, (d) inventory turnover, (e) days' sales in inventory, (f) days'
sales uncollected. (g) profit margin, (h) return on total assets, and (i) return on
common stockholders' equity.

4. Assuming that each company paid cash dividends of $.75 per share and each
company's stock can be purchased at $32 per share, compute their (a) priceearnings
ratios and (b) dividend yields.

5. Prepare a statement containing the following items:
a. Identify the company your group considers to have the better short-term financial position. Back up your decision with appropriate analysis and numbers.

b. Assuming that you had funds to invest in only one of these companies, identify the company your group would invest in. Back up your decision with appropriate analysis and numbers.

Your analysis statement should be prepared on a word processor. The document should contain precise, clear statements indicating your group's viewpoints and supporting computations. Complete sentences composed of correct grammar and spelling should be applied in your document. The length of the statement should be adequate to cover your decisions and provide supporting data.

Place all work for this project in the order listed above and submit the project in a three prong
folder. Place a cover sheet at the front of the project as instructed in the project

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Solution Summary

The problem set deals with estimating common-size values for income statement and balance sheet. The solution will be useful to accounting and finance students.