Question

If you were to compare two companies in the same industry and found that one company had $100 of fixed assets for every $1 of sales, while the other had $200 of fixed assets for every $1 of sales, what would be a possible explanation for the difference.

a) Inefficient use of assets
b) Creative accounting practices
c) Industry norms
d) Economic conditions

Answer 1

The difference in fixed assets to sales ratio between two companies could be due to inefficient use of assets, different accounting practices, industry norms, or varying economic conditions.

Step-by-step explanation:

If we are to compare two companies in the same industry and find that one has $100 of fixed assets for every $1 of sales, while the other has $200 of fixed assets for every $1 of sales, several factors could explain this discrepancy. First, it might indicate an inefficient use of assets, where one company is simply not generating enough sales given its asset base. The discrepancy could also result from different accounting practices, where one company might employ a different method of calculating asset value or sales revenue. Additionally, these ratios might reflect industry norms where high fixed assets in relation to sales are standard for certain high-capital industries like manufacturing. Lastly, economic conditions can affect asset utilization and sales, where one company may be more affected by economic downturns or upswings than another.