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Horngren'S Financial And Managerial Accounting
Found in: Page 835

Short Answer

What is benchmarking, and what are the two main types of benchmarks in financialstatement analysis?

The practice of setting standards of measurement values based on the leading company in the industry and comparing process measurements against such standards is benchmarking.

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Step by Step Solution

Step 1:Meaning of Benchmarking

An important measure or practice that a company follows to compare the performance of a company's processes against a standard/target set up by the industry is known as benchmarking.

In financial statement analysis, we calculate various liquidity ratios (like current ratio, quick ratio), activity ratios (like inventory turnover, receivable turnover, asset turnover, etc.), profitability ratios (like Net Margin, Gross Margin, Return on equity, etc.) and Leverage ratios (like Debt-to-equity ratios). For benchmarking, we get the measurement values of leading companies in the industry, set benchmarks, and compare our values of financial ratios to such benchmarks.

For example, suppose our inventory turnover ratio is four, and the benchmark is 8. In that case, this should trigger the analysis to get the root causes for the difference and areas where we need to improve.

Step 2:Two types of Benchmarking are

  1. Benchmarking against industryand
  2. Benchmarking against a key competitor.

Most popular questions for Business-studies Textbooks

Question: P15-38 Using ratios to evaluate a stock investment

This problem continues the Canyon Canoe Company situation from Chapter 14. The company wants to invest some of its excess cash in trading securities and is considering two investments, The Paddle Company (PC) and Recreational Life Vests (RLV). The income statement, balance sheet, and other data for both companies follow for 2019 and 2018, as well as selected data for 2017:

THE PADDLE COMPANY

Comparative Financial Statements

Years Ended December 31

RECREATIONAL LIFE VESTSComparative Financial Statements Years Ended December 31

Income statement

2019

2018

2017

2019

2018

2017

Net sales revenue

$430,489

$425,410

$410,570

$383,870

Cost of goods sold

258,756

256,797

299,110

280,190

Gross profit

171,733

168,613

111,460

103,680

Operating expenses

153,880

151,922

78,290

70,830

Operating income

17,853

16,691

33,170

32,850

Interest expenses

865

788

2,780

2,980

Income before income tax

16,988

15,903

30,390

29,870

Income tax expenses

5,137

4,809

8,780

8,630

Net income

$11,851

$11,094

$21,610

$21,240

Balance sheet

Assets

Cash & Cash Equivalents

$69,159

$70,793

$65,730

$55,270

Accounts Receivable

44,798

44,452

$44,104

39,810

38,650

$36,460

Merchandise Inventory

79,919

66,341

76,363

68,500

65,230

59,930

Other Current Assets

15,494

16,264

24,450

37,630

Total Current Assets

209,370

197,850

198,490

196,780

Long-term Assets

89,834

90,776

116,760

116,270

Total Assets

$299,204

$288,626

$276,482

$315,250

$$313,050

$310,640

Liabilities

Current Liabilities

$69,554

$60,232

$90,810

$90,010

Long-term Liabilities

31,682

29,936

96,310

105,890

Total Liabilities

101,236

90,168

187,120

195,900

Stockholders’ Equity

Common Stock

72,795

80,885

111,530

102,480

Retained Earnings

125,173

117,573

16,600

14,670

Total Stockholders’ Equity

197,968

198,458

128,130

117,150

103,840

Total Liabilities and Stockholder’s Equity

$299,204

$288,626

$315,250

$313,050

Other data

Market price per share

$21.38

$33.82

$46.37

$51.64

Annual dividend per share

0.32

0.30

0.53

0.45

Weighted average number of shares outstanding

9,000

8,000

9,000

8,000

Requirements

  1. Using the financial statements given, compute the following ratios for both companies for 2019 and 2018. Assume all sales are credit sales. Round all ratios to two decimal places.
  2. a. Current ratio

    h. Profit margin ratio

    b. Cash ratio

    i. Asset turnover ratio

    c. Inventory turnover

    j. Rate of return on common stockholders’ equity

    d. Accounts receivable turnover

    k. Earnings per share

    e. Gross profit percentage

    l. Price/earnings ratio

    f. Debt ratio

    m. Dividend yield

    g. Debt to equity ratio

    n. Dividend payout

  1. Compare the companies’ performance for 2019 and 2018. Make a recommendation to Canyon Canoe Company about investing in these companies. Which company would be a better investment, The Paddle Company or Recreational Life Vests? Base your answer on the ability to pay current liabilities, ability to sell merchandise and collect receivables, ability to pay the long-term debt, profitability, and attractiveness as an investment.
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