Q1- One of the more closely watched ratios by investors is the price/earnings (P/E) ratio. By dividing price per share by earnings per share, analysts get insight into the value the market attaches to a company's earnings. More specifically, a high P/E ratio in comparison to companies in the same industry) may suggest the stock is overpriced. Also, there is some evidence that companies with low P/E ratios are underpriced and tend to outperform the market. However, the ratio can be misleading. P/E ratios are sometimes misleading because the E (earnings) is subject to a number of assumptions and estimates that could result in overstated earnings and a lower P/E. Some analysts conduct revenue analysis" to evaluate the quality of an earnings number. Revenues are less subject to management estimates and all earnings must begin with revenues. These analysts also compute the price-to-sales ratio (PSR = price per share sales per share) to assess whether a company is performing well compared to similar companies. If a company has a price-to-sales ratio significantly higher than competitors, investors may be betting on a stock that has yet to prove itself. Instructions (a) Identify some of the estimates or assumptions that could result in overstated earnings. (b) Compute the P/E ratio and the PSR for Tootsie Roll and Hershey for 2014. (c) Use these data to compare the quality of each company's earnings. Q2- In an examination of Arenes Corporation as of December 31, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items. 1. The corporation erected its present factory building in 2001. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2017. 2. An additional assessment of 2016 income taxes was levied and paid in 2017. 3. When calculating the accrual for officers' salaries at December 31, 2017, it was discovered that the accrual for officers' salaries for December 31, 2016, had been overstated. 4. On December 15, 2017, Arenes Corporation declared a cash dividend on its common stock outstanding, payable February 1, 2018, to the common stockholders of record December 31, 2017. Q1- One of the more closely watched ratios by investors is the price/earnings (P/E) ratio. By dividing price per share by earnings per share, analysts get insight into the value the market attaches to a company's earnings. More specifically, a high P/E ratio in comparison to companies in the same industry) may suggest the stock is overpriced. Also, there is some evidence that companies with low P/E ratios are underpriced and tend to outperform the market. However, the ratio can be misleading. P/E ratios are sometimes misleading because the E (earnings) is subject to a number of assumptions and estimates that could result in overstated earnings and a lower P/E. Some analysts conduct revenue analysis" to evaluate the quality of an earnings number. Revenues are less subject to management estimates and all earnings must begin with revenues. These analysts also compute the price-to-sales ratio (PSR = price per share sales per share) to assess whether a company is performing well compared to similar companies. If a company has a price-to-sales ratio significantly higher than competitors, investors may be betting on a stock that has yet to prove itself. Instructions (a) Identify some of the estimates or assumptions that could result in overstated earnings. (b) Compute the P/E ratio and the PSR for Tootsie Roll and Hershey for 2014. (c) Use these data to compare the quality of each company's earnings. Q2- In an examination of Arenes Corporation as of December 31, 2017, you have learned that the following situations exist. No entries have been made in the accounting records for these items. 1. The corporation erected its present factory building in 2001. Depreciation was calculated by the straight-line method, using an estimated life of 35 years. Early in 2017, the board of directors conducted a careful survey and estimated that the factory building had a remaining useful life of 25 years as of January 1, 2017. 2. An additional assessment of 2016 income taxes was levied and paid in 2017. 3. When calculating the accrual for officers' salaries at December 31, 2017, it was discovered that the accrual for officers' salaries for December 31, 2016, had been overstated. 4. On December 15, 2017, Arenes Corporation declared a cash dividend on its common stock outstanding, payable February 1, 2018, to the common stockholders of record December 31, 2017