Matching Companies With Their Industry Using Common Size Income Statement, Balance Sheet, And Financial Ratios Essay.

Different industries based on their expenses and assets

The behaviour of companies vary depending on the industry. A manufacturer or a producer of a product differ with the distributor of the same product. The assets (plant and machinery) required to manufacture a commodity are more compared to the assets used in distributing the same commodity. Therefore the manufacturing industry is expected to have more fixed assets in its balance sheet. In this case matching of companies with their industry is done using the common size income statement, common size balance sheet and the selected financial ratios.

Companies in the manufacturing industry conduct intensive research and development in order to improve their processes and the quality of the products they manufacture. The percentage of research and development expenses of company number 7 of 20.01 is the highest. The company is drawn from the pharmaceutical preparations industry since it undertakes a lot of research in order to manufacture new and even quality medicine. This is followed by company number 8 (17.18) which is drawn from IT service provider industry and company number 6 (14.61) from the semiconductor manufacturing industry. Lastly is company number 4 (0.32) which is drawn from liquor manufacturing industry. All the four companies are drawn from the manufacturing industry since their operations involves continuous research to enhance the quality of their services and products. Based on the percentage of interest expense, company number 2 is leading with 18.33. The company is from the commercial banking industry and its business involves giving loans and accepting deposits from the customers. Companies in commercial industry pay interests on customer deposits and accept interest on loan advanced to their customers. Therefore having a higher percentage of interest expense.

Patented technology refers to inventions claimed in any patents obtained by, assigned to or licensed. Company number 10 has the highest percentage of intangible assets of 61.39. The company business therefore involves invention and selling its products to interested customers. Therefore drawn from the computer software industry. This is followed by company number 3 with a percentage of 20.87 of its total assets and is drawn from the mobile phone service provider industry who also deal with invention of mobiles and related products. Having invented a product the company can license its assets for use by other companies in the same industry. Notes payable represents the liabilities (money) a firm owes its financiers (financial institutions). Company number 2 has the highest percentage of notes payable indicating the company borrows money for a long term so as give out loans to customers and undertake investments. Therefore it’s drawn from the commercial banking industry.

Day’s receivable measures the average number of days debtors take to pay up. The lesser the period, the better for the firm because it improves its liquidity position. Company number 9 with 11.99 receivable day’s has the shortest collection period and is drawn from the commercial airline industry. The customers who are the travellers normally pay for their air ticket promptly. In case of any arrangement to pay later, it takes the shortest time possible.  The company number 2 has the longest day’s receivables of 2540.75. It’s drawn from the commercial banking industry since the nature of the business involves giving customers loan at an interest which is to be paid an agreed period. This could even take five to seven years.  Asset turnover measures the efficiency in which the firm is using its assets to generate sales (Gowthorpe, 2011).   Company number 1 has the highest asset turnover ratio indicating the company uses its assets to generate direct sales. Therefore it’s drawn from integrated oil and gas industry whose business involves extraction of oil and related products and selling. Day’s inventory measures the number of days the firm takes to convert the raw materials to finished goods. Company number 5 business does not involve conversion of raw materials and does not have day’s inventory. Therefore it’s drawn from retail grocery stores industry whose business involves storage of goods and charging a storage fee in order to earn income. Company number 2 also has no day’s inventory and is drawn from commercial banking industry since its business does not involve conversion of raw materials to finished goods. 

References

Gowthorpe, G. (2011). Business Accounting and Finance. 3rd ed. Knowledge Works Global Ltd India: Brendan, George.