Questions

Questions for Chapter 9 Sales and Profit Margin

Review questions

Q-9.1 Why is sales revenue analysis at the heart of financial analysis?
Q-9.2 Is the analysis of revenues only applicable for companies for profit, or for not-for-profit organizations as well? Explain.

Q-9A.1 Are sales more important than cash and receivables for the banker making a loan?
Q-9A.2 What makes projections of sales revenue difficult to estimate? List reasons.
Q-9A.3 Explain why a defensive strategy of maintaining sales volume is usually not sufficient to safeguard a solid future for a company?
Q-9A.4 Why is missing sales unforgivable?
Q- Explain how serving a customer well is at the heart of corporate success in every field of endeavor.
Q-9A.5 Explain why a firm must always seek to serve a customer ever better.
Q-9A.6 Are aggressive and defensive marketing strategies contradictory or complementary? Discuss.
Q-9A.7 Give examples of where company valuation by analysts is based on sales.

Q-9B.1 What information is obtained by studying sales using current results only?
Q-9B.2 How many years should be studied?
Q-9B.3 How is sales data adjusted for inflation?
Q-9b.4 What are the dangers of using indexes to adjust sales data?

Q-9B1.1 In which method of accounting sales are recognized when payment is made?
Q-9B1.2 In which method of accounting sales are usually not recognized when payment is made?
Q-9B1.3 In an accrual method of accounting, which are the different points in time that a sale can conceivably be recognized?
Q-9B1.4 Where is it specified when the transfer of property passes from seller to purchaser in normal trade (i.e. not in a transaction subject to its own contract)?
Q-9B1.5 What is the most common accounting policy for sales recognition?
Q-9B1.6 What words and abbreviation indicate the location where the transfer of ownership of merchandise takes place?
Q-9B1.7 What costs are assumed by the purchaser after the transfer of ownership?
Q-9B1.8 How have American courts decided on what is necessary for a sale to be completed?
Q-9B1.9 Give examples of recognition of revenue after delivery is completed.
Q-9B1.10 Give examples of recognition of revenue before completed delivery.

Q-9B2.1 What can sales people do to boost sales?
Q-9B2.2 What inducements other than those related to price, can be offered to purchaser to encourage sales?
Q-9B2.3 What strategy is used to reduce the revenues reported in a given year in the most legal way?

Q-9B3.1 List the four common price inducements.
Q-9B3.2 What is the name given to a price inducement based on large quantity?
Q-9B3.3 What is the name given to a price inducement given to good customers, for poor quality or conditions that benefit the seller?
Q-9B3.4 What is the name given to a price inducement related to price reduction after the sale is completed for defective merchandise or for promotion and advertisement?
Q-9B3.5 What is the name given to a price inducement given for quick payment?
Q-9B3.6 In which part of the financial statements do quantity discounts and rebates appear?
Q-9B3.7 In which part of the financial statements do allowances appear?
Q-9B3.8 In which part of the financial statements do cash discounts appear?
Q-9B3.9 In which part of the financial statements do allowances for bad debt appear?
Q-9B3.10 Should an outside analyst modify reported sales revenues if it is determined that sales people have been excessively aggressive? Explain.

Q-9B4.1 Is it recommended to conduct a financial analysis on each product line separately? Discuss.
Q-9B4.2 What items of information is available in annual reports on segments of activity?
Q-9B4.3 Is the data on segments of activity sufficient to construct an income statement and balance sheet?
Q-9B4.4 How many different product lines can conglomerates have?
Q-9B4.5 Are the product lines of all conglomerates in the same type of products or sector of industry?
Q-9B4.6 What lacks focus when a company has many different types of products?

Q-9B4.1 Why is a monthly breakdown of sales often informative?
Q-9B4.2 Give examples of product lines where revenues are most seasonal.
Q-9B4.3 What statements provide information within a fiscal year?
Q-9B4.4 What is the problem with quarterly reports?

Q-9C1.1 What are the items that make up the cost of goods sold amount?
Q-9C1.2 Is the determination of cost of goods sold different under cash and accrual methods of accounting?
Q-9C1.3 When is an exact matching of items sold and cost of items sold possible?
Q-9C1.4 What method of accounting is necessary to allow perfect matching of revenues and costs of sales?
Q-9C1.5 Give formula for cost of goods sold calculation.
Q-9C1.6 Are cost of goods sold amounts affected by inventory methods? Explain how.
Q-9C1.7 Can an outside analyst verify the cost of goods sold amount?
Q-9C1.8 How often is inventory taking in American companies?
Q-9C1.9 How large is the error in inventory determination?
Q-9C1.10 What elements contribute to the error in inventory?
Q-9C1.11 Is the error in inventory often larger than the inflation rate?
Q-9C1.12 Do firms in the same industry use different inventory maintenance and accounting policies?
Q- 9C1.13What method of accounting FIFO or LIFO is recommended in time of high inflation? Why?

Q-9C2.1 What is the name given to the improvement in unit cost and speed of production as experience is gained?
Q-9C2.2 Are all industries affected by the learning curve?
Q-9C2.3 In which phase(s) of the product life cycle does the learning curve benefit firms most?
Q-9C2.4 How does the learning curve translate into marketing goal?
Q-9C2.5 Are increases in sales achievable by all firms in an industry?
Q-9C2.6 What goal can a small firm set for itself?
Q-9C2.7 Should the leading firm of a stable industry accept not to seek sales growth?
Q-9C2.8 What production strategy is implied by a marketing strategy of sales expansion with lower prices?
Q-9C2.9 Do firms seek sales growth independently of profit objective? Explain.

Q-9C3.1 What is the name given to the difference between sales revenue and cost of goods sold?
Q-9C3.2 Give formula for gross profit margin?
Q-9C3.3 What is the name of the most common pricing method?
Q-9C3.4 How is the cost-plus method of pricing named in retailing?
Q-9C3.5 What dictates a uniform mark up in retailing?
Q-9C3.6 What is the danger of strict abidance to cost-plus pricing?
Q-9C3.7 What are the immediate consequences of mispriced products?
Q-9C3.8 What should be the guide for pricing of products?
Q-9C3.9 How are consumer preferences determined?
Q-9C3.10 What methods are used to determine what price a market will bear?
Q-9C3.11 What is the economic determination of price in perfect competition?
Q-9C3.12 What is the economic determination of price in condition other than perfect competition?
Q-9C3.12 What pricing strategy does a monopoly use?
Q-9C3.13 What danger does a monopoly face in using a monopolistic pricing strategy?
Q-9C3.14 What should an analyst look for in annual reports in terms of pricing strategy?

Q-9D.1 What is the name given to an analysis to determine the impact of pricing and volume decisions on the ability to remain profitable?
Q-9D.2 What is the name given to the volume where revenues cover all costs?
Q-9D.3 What is the time horizon of a break-even analysis?
Q-9D.4 To what is fixed cost equal at the break-even point?

Q-9D1.1 What are the costs that change with the volume of production?
Q-9D1.2 What are the costs that do not change with the volume of production?
Q-9D1.3 Give formula for the volume at break-even point.
Q-9D1.4 Give formula for total cost equal total revenue.
Q-9D1.5 What is equal to zero at the break-even point?

Q-9D2.1 What must be the conclusion drawn by management from a production that is at or close to break-even?
Q-9D2.2 On what depends the decision to continue or not production of items that are very close to the break-even point?
Q-9D2.3 How important is sales stability for production at break-even point? Discuss.

Q-9D3.1 Give examples of extensions of the break-even analysis.
Q-9D3.2 Why should low margin products continue to be produced when a firm has several high margin products?
Q-9D3.3 Can alternative methods of production be studied with break-even analysis?

Q-9E.1 Should a sales analysis be conducted on aggregate sales or by product line?
Q-9E.2 What are the four steps in company sales analysis?

Q-9E1.1 How many years of data are necessary to estimate a sales growth rate?
Q-9E1.2 What affects the choice of years to include in a sales growth estimation?
Q-9E1.3 How many years should be included for a company that is restructuring?
Q-9E1.4 What is necessary if projections are made for less than a year?
Q-9E1.5 For what types of loans is a monthly sales analysis required?
Q-9E1.6 Should sales data be adjusted for inflation if the analysis involves real data series?
Q-9E1.7 To what is the sales growth rate compared?
Q-9E1.8 What other measure is necessary than average growth rate when studying sales?
Q-9E1.9 What statistic is used to measure sales instability?
Q-9E1.10 To what the sales instability compared to?
Q-9E1.11 Is the sales standard deviation of a given company larger than that of the industry?
Q-9E1.12 Do growth and instability go together?
Q-9E1.13 What are two major sources of company sales instability?
Q-9E1.14 What problem may be present if growth is strong and very stable?
Q-9E1.15 What is likely when company sales grow by sudden large jumps?
Q-9E1.16 What are the dangers of sales growth through acquisitions?
Q-9E1.17 Is there a finite limit to high sales growth of conglomerates? How?

Q-9E2.1 What mathematical procedure is used to determine the relationship between company sales and economic trend(s)?
Q-9E2.2 Is there a short cut for regression analysis? Which?
Q-9E2.3 What is the purpose of comparing sales pattern to business cycle data?
Q-9E2.4 What additional tests are recommended when conducting a regression analysis on sales correlation with business cycle?
Q-9E2.5 Give an example of an industry that precedes the business cycle.
Q-9E2.6 Give an example of an industry that lags the business cycle.
Q-9E2.7 What needs to be investigated if sales do not correlate with the business cycle?

Q-9E3.1 To what are company sales compared to after comparing to the overall economy?
Q-9E3.2 What shortcut is used when comparing company sales to industry?
Q-9E3.3 What should an analyst investigate if company market share has been going up while no noticeable new marketing strategy has been implemented by the company?
Q-9E3.4 What should an analyst investigate if company market share has been eroding while the marketing strategies of all competitors remained unchanged?
Q-9E3.5 What should the company undertake if sales and market share are eroding?

Q-9E4.1 What is the name given to the procedure of determining customer preferences?
Q-9E4.2 When is a market research regularly scheduled?
Q-9E4.3 When is a market research justifiable for an outside analyst?

Q-9E5.1 How are sales analyzed in foreign markets?
Q-9E5.2 What special difficulties exist when studying foreign markets?
Q-9E5.3 Why is it often easier to study and predict foreign market sales?
Q-9E5.4 For which countries is an extension of domestic sales applicable in sales analysis?

Q-9E6.1 What should be studied after economic, social trends, industry and foreign market aspects?
Q-9E6.2 What are the four P's of marketing?
Q-9E6.3 What other internal strategies must also be looked at in how they affect marketing?
Q-9E6.4 Should an analyst downgrade a company for inappropriate marketing strategy?

Q-9F1.1 Does the empirical evidence shows that larger firms have larger gross profit margins?
Q-9F1.2 For which industries is the gross profit margin comparable for small and large firms?
Q-9F1.3 For which industries is the gross profit margin of smaller firms significantly larger?
Q-9F1.4 Does the empirical evidence show that larger firms have higher unit costs?
Q-9F1.5 What explanations can be offered for the higher gross margins of smaller firms?

Q-9F2.1 Does the empirical evidence show that the gross margin of American businesses has significantly changed over the past half century?
Q-9F2.2 Has the gross margin of American businesses suffered due to inflation?

Q-9G.1 What is the end goal of sales analysis?
Q-9G.2 Why is sales projection crucial in financial analysis?
Q-9G.3 Do American firms make their forecasts customarily public?
Q-9G.4 Which types of American companies do make their forecasts public?
Q-9G.5 How did the SEC try to encourage publication of corporate forecasts?
Q-9G.6 Why should an analysis be weary of company published forecasts?
Q-9G.7 What is MDA in an annual report?
Q-9G.8 What is the most common method of sales projection?
Q-9G.9 What approach is a major improvement on extrapolation from prior years?

Q-9G1.1 What must be forecasted first before forecasting company sales?
Q-9G1.2 List the four fields of analysis of industry sales.
Q-9G1.3 Is there a prescribed method of industry sales forecasting?
Q-9G1.4 List some of the industry sales forecasting methods.

Q-9G2.1 What is a major consideration is analyzing the interaction of the company with its industry?
Q-9G2.2 What does it mean for an industry to be concentrated?
Q-9G2.3 What are the consequences of high industry concentration?
Q-9G2.4 What is the optimal strategy for a firm in an industry that is not concentrated?
Q-9G2.5 How does industry concentration evolve over the life of a product?
Q-9G2.6 How do firms in the industry align their prices?
Q-9G2.7 What strategy is available to a firm that wants to dominate a market where it is not a technology leader?
Q-9G2.8 What strategies are available to firms that are neither price nor technology leaders?

Q-9G3.1 Where should a company strategy be apparent?
Q-9G3.2 What are some of the typical aspects of a company sales strategy?
Q-9G3.3 How is an analysis of expenses useful to verify a company sales strategy?
Q-9G3.4 How is an aggressive price strategy evaluated with statistics?
Q-9G3.5 What must be forecasted for industry with rapid rate of product introduction?

Q-9G4.1 What are the two approaches to formulation of a sales forecast
Q-9G4.2 What is the name given to an approach starting from company plans and confirming justification of the plans with outside data?
Q-9G4.2 What should an analyst do if plans do not coincide with prior year company performance?
Q-9G4.3 What is the name given to a forecasting approach that starts from the very general and infers consequences for industries and companies?
Q-9G4.4 What is the first task in a top-down forecasting method?
Q-9G4.5 List some of the trends that should be investigated in a top-down approach?
Q-9G4.6 How are prior year industry sales pattern modified? Explain.
Q-9G4.7 How are market share of individual companies modified? Explain.
Q-9G4.8 What input should an analyst seek in formulating a sales forecast?
Q-9G4.9 Should an analyst forecast be presented to company management for comments?
Q-9G4.10 How do cost and resource availabiltiy considerations enter into a sales forecast? Give examples?
Q-9G4.11 What should be the last task of an analyst in preparing a sales forecast?
Q-9G4.12 What is the purpose of the forecast error estimation?

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Last modified: Jun/01/01 Next: Exercises, Cases & Assignments