Company A, which has the same type of equipment as Company B, uses the straight line method of

depreciation while Company B uses the declining balance method. This is the first year of operations

for both companies.

Consider only the impact of the choice of depreciation method, determine which company will report

a higher (1) current ratio, (2) debt to assets ratio, and (3) profit margin ratio or If the depreciation

method will have no impact. (3 Marks)

Part 2:

Selected ratios for the current year for the two companies in the beverage industry. Orange Inc,

and Cherry Inc.

Asset turnover

Basic Earnings per share

Current ratio

Debt to total assets

Dividend yield

Gross profit margin

Inventory turnover

Payout ratio

Price earnings ratio

Profit margin

Receivables turnover

Return on assets

Return on common shareholder's equity

Times interest earned

Orange Inc.

1 time

$ 0.98

2.2 to 1

56%

0.2%

73.8%

5.8 times

10%

14.3 times

9.3%

9 8 times

9.3%

25.7%

12 3 times

Cherry Inc.

1 time

$ 1.37

1.6 to 1

72%

1.1%

60%

9 9 times

20.5%

20.3 times

10.2%

10.4 times

10.2%

29.8%

6.9 times

Based on the above information

(a) Determine and explain which company is managing its inventory better? (3 Marks)

(b) Which company, Orange or Cherry, is more solvent? Identify the ratio(s) used to determine this

and defend your choice. (2 Marks)

(c) Which company, Orange or Cherry do investors appear to believe has greater prospects for future

growth in their investments? Indicate 3 ratios you used to reach your conclusion and explain

your reasoning. (6 Marks)