Common Size Balance Sheets Flashcards
Challenge Questions
In 2023, Alphabet Inc. (Google) and Meta Platforms Inc. (Facebook) reported the following balance sheet data: Alphabet had $300 billion in total assets, $50 billion in cash, and $200 billion in equity. Meta had $150 billion in total assets, $45 billion in cash, and $90 billion in equity. Based on a common-size balance sheet analysis, which company shows a higher cash position relative to total assets, and what does this indicate about their liquidity?
A) Alphabet shows higher cash as a percentage of total assets, indicating stronger liquidity compared to Meta.
B) Meta shows higher cash as a percentage of total assets, suggesting it maintains a more conservative approach to liquidity.
C) Both companies have the same cash percentage relative to total assets, indicating identical liquidity management strategies.
D) Meta’s cash position suggests a riskier approach to liquidity management compared to Alphabet.
Answer Explanation:
Correct Answer: B) Meta shows higher cash as a percentage of total assets, suggesting it maintains a more conservative approach to liquidity.
Calculation and Explanation:
Alphabet’s cash as a percentage of total assets: $50 billion / $300 billion = 16.7%.
Meta’s cash as a percentage of total assets: $45 billion / $150 billion = 30%.
Meta has a significantly higher cash percentage, indicating a more conservative approach to managing liquidity compared to Alphabet.
Option A is incorrect as Alphabet’s liquidity ratio is lower.
Option C is incorrect since their percentages differ.
Option D is incorrect as Meta’s higher cash position suggests lower, not higher, liquidity risk.
Tesla and Ford report the following balance sheets: Tesla has $200 billion in assets, with 70% in plant and equipment and 60% total liabilities. Ford has $150 billion in assets, with 50% in plant and equipment and 80% total liabilities. Based on the common-size balance sheet, what strategic differences are indicated between the two companies?
A) Tesla’s high investment in plant and equipment suggests a focus on innovation and manufacturing capabilities, while Ford’s higher liabilities indicate aggressive financing strategies.
B) Ford’s lower investment in plant and equipment suggests a focus on outsourcing, while Tesla’s lower liabilities indicate conservative financial management.
C) Both companies demonstrate similar capital structures, reflecting identical strategic approaches to asset management and financing.
D) Tesla’s higher liabilities indicate a more leveraged position compared to Ford, suggesting higher financial risk.
Answer Explanation:
Correct Answer: A) Tesla’s high investment in plant and equipment suggests a focus on innovation and manufacturing capabilities, while Ford’s higher liabilities indicate aggressive financing strategies.
Explanation:
Tesla’s 70% plant and equipment suggests significant investment in manufacturing and innovation, aligning with its strategy of expanding production capabilities.
Ford’s 80% liabilities reflect an aggressive use of debt financing, contrasting with Tesla’s more balanced structure.
Option B is incorrect as Ford’s focus on lower plant investment does not necessarily imply outsourcing.
Option C is incorrect due to distinct differences in asset and liability structures.
Option D misinterprets Tesla’s leverage relative to Ford.
Amazon reported a common-size balance sheet where 15% of its assets were cash and 50% were financed through debt. Walmart reported 10% of assets as cash and 70% financed through debt. What can be inferred about Amazon and Walmart’s risk and liquidity management from this analysis?
A) Amazon’s higher cash ratio indicates better liquidity management, while Walmart’s higher debt ratio suggests greater financial risk.
B) Walmart’s lower cash and higher debt ratio indicate superior liquidity management compared to Amazon.
C) Amazon and Walmart have equivalent liquidity risk due to similar cash ratios, with differing approaches to debt financing.
D) Both companies show conservative financial management with balanced approaches to cash and debt management.
Answer Explanation:
Correct Answer: A) Amazon’s higher cash ratio indicates better liquidity management, while Walmart’s higher debt ratio suggests greater financial risk.
Explanation:
Amazon’s 15% cash indicates stronger liquidity management compared to Walmart’s 10%.
Walmart’s 70% debt suggests it is more heavily leveraged, increasing financial risk.
Option B is incorrect as Walmart’s lower cash and higher debt indicate weaker liquidity management.
Option C misstates the liquidity risk as similar, which is not the case.
Option D incorrectly characterizes their financial management as conservative.
Comparing Apple Inc. and Microsoft Corp., Apple has 40% of its total assets in cash and marketable securities, while Microsoft holds 20% of its assets in similar short-term investments. How does this impact their financial flexibility, and what strategic differences might this imply?
A) Apple’s larger cash holdings indicate greater financial flexibility, positioning it to capitalize on strategic acquisitions and investments more aggressively than Microsoft.
B) Microsoft’s lower cash ratio suggests a focus on operational efficiency, utilizing cash more effectively than Apple.
C) Both companies maintain similar levels of financial flexibility, reflecting parallel strategies in cash management.
D) Microsoft’s lower cash holdings imply it has a riskier financial position compared to Apple, reflecting weaker liquidity.
Answer Explanation:
Correct Answer: A) Apple’s larger cash holdings indicate greater financial flexibility, positioning it to capitalize on strategic acquisitions and investments more aggressively than Microsoft.
Explanation:
Apple’s 40% cash position suggests a more substantial buffer to pursue acquisitions and strategic investments compared to Microsoft’s 20%.
Option B incorrectly suggests that lower cash holdings indicate superior efficiency.
Option C is incorrect because the cash positions and therefore the financial flexibility differ significantly.
Option D misinterprets the impact of Microsoft’s lower cash on financial risk.
Berkshire Hathaway has 55% of its assets in equity investments, while JPMorgan Chase has 15% in cash and 65% in loan portfolios. What does a common-size balance sheet analysis reveal about their strategic focus and financial risk profiles?
A) Berkshire’s high equity investments indicate a strategy focused on capital appreciation, while JPMorgan’s loan-heavy balance sheet suggests significant credit risk exposure.
B) JPMorgan’s higher percentage of loans shows a conservative approach to asset management, while Berkshire’s equity positions suggest a lower risk profile.
C) Both firms exhibit similar financial risk due to their large investment portfolios, reflecting comparable strategic objectives.
D) Berkshire’s focus on equity investments implies a risk-averse strategy compared to JPMorgan’s aggressive loan issuance.
Answer Explanation:
Correct Answer: A) Berkshire’s high equity investments indicate a strategy focused on capital appreciation, while JPMorgan’s loan-heavy balance sheet suggests significant credit risk exposure.
Explanation:
Berkshire’s 55% equity investments suggest a strategy of generating returns through market appreciation and dividend income.
JPMorgan’s 65% loan portfolio indicates a focus on credit issuance, subjecting it to potential credit risk.
Option B mischaracterizes JPMorgan’s loan exposure as conservative.
Option C is incorrect as the risk profiles differ substantially between equity and loan investments.
Option D incorrectly suggests Berkshire is risk-averse, which is not typically associated with heavy equity investments.
In 2022, ExxonMobil reported current assets of $80 billion, including $15 billion in inventory, and current liabilities of $60 billion. Chevron, in the same period, reported current assets of $50 billion, including $5 billion in inventory, and current liabilities of $35 billion. Given the liquidity ratios, which of the following best describes the comparative liquidity positions of ExxonMobil and Chevron?
A) ExxonMobil has a better liquidity position based on the current ratio, indicating superior short-term financial health compared to Chevron.
B) Chevron has a higher quick ratio than ExxonMobil, suggesting better liquidity management when inventory is excluded.
C) ExxonMobil’s cash ratio is higher, showing a stronger capacity to cover immediate liabilities using cash and marketable securities compared to Chevron.
D) Both companies have identical quick ratios, indicating comparable liquidity without considering inventory.
Answer Explanation:
Correct Answer: B) Chevron has a higher quick ratio than ExxonMobil, suggesting better liquidity management when inventory is excluded.
Calculation and Explanation:
ExxonMobil’s Ratios:
Current Ratio = $80 billion / $60 billion = 1.33.
Quick Ratio = ($80 billion - $15 billion) / $60 billion = $65 billion / $60 billion = 1.08.
Chevron’s Ratios:
Current Ratio = $50 billion / $35 billion = 1.43.
Quick Ratio = ($50 billion - $5 billion) / $35 billion = $45 billion / $35 billion = 1.29.
Chevron’s higher quick ratio indicates better liquidity when excluding inventory, despite ExxonMobil’s stronger current ratio.
Option A is incorrect as ExxonMobil’s current ratio is less indicative of liquidity when inventory is factored out.
Option C incorrectly assumes a higher cash ratio without given data.
Option D is incorrect because the quick ratios are not identical.
In 2023, Tesla reported total assets of $200 billion and equity of $80 billion, while Ford reported total assets of $150 billion and equity of $100 billion. Tesla’s total debt includes $50 billion of long-term debt, whereas Ford’s debt includes $30 billion of long-term debt. What does a comparative solvency analysis using the financial leverage ratio and the long-term debt-to-equity ratio reveal?
A) Tesla has a higher financial leverage ratio, indicating it is more reliant on debt financing compared to Ford, and potentially higher financial risk.
B) Ford’s long-term debt-to-equity ratio is higher, reflecting a more aggressive approach to long-term debt financing compared to Tesla.
C) Tesla’s total debt-to-equity ratio is higher, suggesting greater overall solvency risk despite lower use of long-term debt.
D) Ford’s financial leverage ratio indicates similar levels of risk compared to Tesla, showing no significant differences in their solvency.
Answer Explanation:
Correct Answer: A) Tesla has a higher financial leverage ratio, indicating it is more reliant on debt financing compared to Ford, and potentially higher financial risk.
Calculation and Explanation:
Tesla’s Ratios:
Financial Leverage Ratio = $200 billion / $80 billion = 2.5.
Long-term Debt-to-Equity = $50 billion / $80 billion = 0.625.
Ford’s Ratios:
Financial Leverage Ratio = $150 billion / $100 billion = 1.5.
Long-term Debt-to-Equity = $30 billion / $100 billion = 0.3.
Tesla’s higher leverage ratio highlights its increased reliance on overall debt financing compared to Ford, leading to potentially higher risk.
Option B incorrectly states Ford’s long-term debt-to-equity ratio as higher.
Option C misinterprets Tesla’s overall debt impact on solvency.
Option D is incorrect as Tesla’s leverage ratio is significantly higher.
In 2023, JPMorgan Chase reported total liabilities of $2.6 trillion and total assets of $3.5 trillion. Goldman Sachs reported total liabilities of $900 billion and total assets of $1.1 trillion. If analysts compare these firms using the debt ratio, what can be inferred about their relative financial stability?
A) JPMorgan Chase’s lower debt ratio suggests superior financial stability compared to Goldman Sachs, reflecting conservative risk management.
B) Goldman Sachs exhibits a higher debt ratio, indicating increased leverage and potentially higher solvency risk relative to JPMorgan Chase.
C) Both firms have identical debt ratios, suggesting similar levels of financial risk despite their size differences.
D) JPMorgan Chase’s debt ratio indicates it is more leveraged and at greater financial risk compared to Goldman Sachs.
Answer Explanation:
Correct Answer: D) JPMorgan Chase’s debt ratio indicates it is more leveraged and at greater financial risk compared to Goldman Sachs.
Calculation and Explanation:
JPMorgan Chase’s Debt Ratio = $2.6 trillion / $3.5 trillion = 74.3%.
Goldman Sachs’ Debt Ratio = $900 billion / $1.1 trillion = 81.8%.
Goldman Sachs’ higher debt ratio indicates increased financial risk and leverage compared to JPMorgan Chase.
Option A is incorrect because JPMorgan Chase’s lower debt ratio still signifies considerable leverage.
Option B correctly identifies Goldman Sachs’ higher risk, but misleads in the context of comparing stability with JPMorgan Chase.
Option C wrongly assumes identical risk levels.
Pfizer Inc. reports current assets of $40 billion, including $10 billion in cash and marketable securities, and current liabilities of $25 billion. Merck & Co. reports current assets of $30 billion, including $5 billion in cash and marketable securities, and current liabilities of $15 billion. How do Pfizer’s and Merck’s liquidity ratios reflect their ability to cover short-term obligations?
A) Pfizer’s higher cash ratio compared to Merck suggests stronger immediate liquidity and a better position to cover short-term liabilities.
B) Merck’s current ratio is higher, indicating superior overall liquidity management compared to Pfizer.
C) Both companies have identical quick ratios, reflecting similar short-term financial strategies.
D) Pfizer’s quick ratio is lower, suggesting it has more inventory and a weaker liquidity position than Merck.
Answer Explanation:
Correct Answer: A) Pfizer’s higher cash ratio compared to Merck suggests stronger immediate liquidity and a better position to cover short-term liabilities.
Calculation and Explanation:
Pfizer’s Ratios:
Current Ratio = $40 billion / $25 billion = 1.6.
Cash Ratio = $10 billion / $25 billion = 0.4.
Merck’s Ratios:
Current Ratio = $30 billion / $15 billion = 2.0.
Cash Ratio = $5 billion / $15 billion = 0.33.
Pfizer’s higher cash ratio indicates stronger immediate liquidity despite a lower current ratio.
Option B misinterprets current ratio relevance compared to the cash ratio.
Option C inaccurately states identical quick ratios.
Option D incorrectly assesses Pfizer’s liquidity position.
Boeing reports total assets of $100 billion and equity of $25 billion, with long-term debt of $50 billion. Lockheed Martin reports total assets of $75 billion, equity of $30 billion, and long-term debt of $20 billion. Based on the financial leverage ratio and long-term debt-to-equity ratio, what does this reveal about the companies’ leverage strategies?
A) Boeing’s higher financial leverage ratio suggests a more aggressive use of debt compared to Lockheed Martin, exposing it to greater solvency risk.
B) Lockheed Martin’s lower long-term debt-to-equity ratio indicates it employs more conservative debt management compared to Boeing.
C) Boeing’s total debt-to-equity ratio shows a more balanced approach to financing compared to Lockheed Martin’s heavy reliance on equity.
D) Both firms exhibit similar leverage strategies, with comparable levels of financial risk from their debt structures.
Answer Explanation:
Correct Answer: A) Boeing’s higher financial leverage ratio suggests a more aggressive use of debt compared to Lockheed Martin, exposing it to greater solvency risk.
Calculation and Explanation:
Boeing’s Ratios:
Financial Leverage Ratio = $100 billion / $25 billion = 4.0.
Long-term Debt-to-Equity = $50 billion / $25 billion = 2.0.
Lockheed Martin’s Ratios:
Financial Leverage Ratio = $75 billion / $30 billion = 2.5.
Long-term Debt-to-Equity = $20 billion / $30 billion = 0.67.
Boeing’s significantly higher leverage ratios reflect a more aggressive use of debt compared to Lockheed Martin.
Option B correctly identifies conservative debt management by Lockheed but misdirects the main comparison.
Option C misinterprets overall leverage impact.
Option D is incorrect as leverage strategies differ significantly.
