Effective financial statement analysis requires an

understanding of a firm s economic

Effective financial statement analysis requires an understanding of a firm’s economic
characteristics. The relations between various financial statement items provide evidence of
many of these economic characteristics. Exhibit 1.23 presents common-size condensed
balance sheets and income statements for 12 firms in different industries. These common-size
balance sheets and income statements express various items as a percentage of operating
revenues. (That is, the statement divides all amounts by operating revenues for the year.)
Exhibit 1.23 also shows the ratio of cash flow from operations to capital expenditures. A dash
for a particular financial statement item does not necessarily mean the amount is zero. It merely
indicates that the amount is not sufficiently large for the firm to disclose it. A list of the 12
companies and a brief description of their activities follow.A. Abercrombie & Fitch: Sells retail
apparel primarily through stores to the fashion-conscious young adult and has established itself
as a trendy, popular player in the specialty retailing apparel industry.B. Allstate Insurance: Sells
property and casualty insurance, primarily on buildings and automobiles. Operating revenues
include insurance premiums from customers and revenues earned from investments made with
cash received from customers before Allstate pays customers’ claims. Operating expenses
include amounts actually paid or expected to be paid in the future on insurance coverage
outstanding during the year. C. Best Buy: Operates a chain of retail stores selling consumer
electronic and entertainment equipment at competitively low prices.D. E. I. du Pont de Nemours:
Manufactures chemical and electronics products.E. Hewlett-Packard: Develops, manufactures,
and sells computer hardware. The firm outsources manufacturing of many of its computer
components.F. HSBC Finance: Lends money to consumers for periods ranging from several
months to several years. Operating expenses include provisions for estimated uncollectible
loans (bad debts expense).G. Kelly Services: Provides temporary office services to businesses
and other firms.Operating revenues represent amounts billed to customers for temporary help
services, and operating expenses include amounts paid to the temporary help employees of
Kelly.H. McDonald’s: Operates fast-food restaurants worldwide. A large percentage
ofMcDonald’s restaurants are owned and operated by franchisees. McDonald’s frequently
owns the restaurant buildings of franchisees and leases them to franchisees under long-term
leases.I. Merck: A leading research-driven pharmaceutical products and services company.
Merck discovers, develops, manufactures, and markets a broad range of products to improve
human and animal health directly and through its joint ventures.J. Omnicom Group: Creates
advertising copy for clients and is the largest marketing services firm in the world. Omnicom
purchases advertising time and space from various media and sells it to clients. Operating
revenues represent commissions and fees earned by creating advertising copy and selling
media time and space. Operating expenses includes employee compensation.K. Pacific Gas &
Electric: Generates and sells power to customers in the western United States.L. Procter &
Gamble: Manufactures and markets a broad line of branded consumer products.RequiredUse
the ratios to match the companies in Exhibit 1.23 with the firms listed above.View Solution:
Effective financial statement analysis requires an understanding of a firm s economic
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