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Analysis Of Financial Statements

Instructions:

Answer 50 questions in 15 minutes.
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Match each statement with the correct term.
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This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.

1. If total assets are $20 million - noncurrent assets are $2 million - inventory is $3 million - and sales are $5 million for Toronto Brewing Company - what is the inventory turnover ratio?
Cross-sectional analysis
Inventory Turnover = 5000000/3000000 = 1.67
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Times Interest Earned = EBIT / Interest Expense

2. What is a financial ratio?
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
A financial ratio is a number that expresses the value of one financial variable relative to another. Put more simply - a financial ratio is the result you get when you divide one financial number by another. Calculating an individual ratio is simple
Trend analysis uses ratios to compare a firm's past and present performance.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

3. How do you calculate net profit margin? (This is a Profitability Ratio)
The Du Pont System of ratio analysis examines the relationships between ratios.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Current and potential lenders of long-term funds - such as banks and bondholders - are interested in debt ratios. When a business's debt ratios increase significantly - bondholder and lender risk increases because more creditors compete for that firm
Both focus on the value of the stock: MVA focuses on total market value while M/B focuses on per share stock price and both focus on total invested capital.

4. If the net profit margin of Dobie's Dog Hotel is maintained at 20 percent and total asset turnover ratio is .25 - calculate return on assets.
Inventory turnover ratio
Profitability ratios measure how much company revenue is eaten up by expenses - how much a company earns relative to sales generated - and the amount earned relative to the value of the firm's assets and equity.
Total Asset Turnover = Sales / Total Assets
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

5. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Sales
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Credit sales = $4000000
Inventory Turnover = Sales / Inventory

6. How do you calculate the debt to total assets? (This is a Debt Ratio)
Current and potential lenders of long-term funds - such as banks and bondholders - are interested in debt ratios. When a business's debt ratios increase significantly - bondholder and lender risk increases because more creditors compete for that firm
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Debt to Total Assets = Total Debt / Total Assets
Total Asset Turnover = Sales / Total Assets

7. Malpaso Company has current assets of $50000. Total assets are $200000; and longterm liabilities and common stock collectively total $180000. What is the value of the current ratio?
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Equity multiplier
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

8. Explain the difference between the current and the quick ratio.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt to equity ratio
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

9. Which ratios would a potential long-term bond investor be most interested in? Explain.

10. What does economic value added (EVA) measure?

11. Given $2 -044000 in total assets - $1 -351000 in total stockholders' equity - and debt-to-total-asset ratio of 33.90% - calculate the debt to equity ratio.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current ratio
($100000 current assets - inventory)

12. How do you calculate operating profit margin? (This is a Profitability Ratio)
Total Asset Turnover = Sales / Total Assets
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory Turnover = Sales / Inventory
Operating Profit Margin = Earnings before Interest and Taxes / Sales

13. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Economic Value Added (EVA) measures the amount of profit remaining after accounting for the return expected by the firm's investors and is said to be an ?estimate of the true economic profit.
Average collection period
Inventory turnover ratio
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi

14. Why is the EVA an important new tool in financial analysis?
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Economic Value Added (EVA) measures the amount of profit remaining after accounting for the return expected by the firm's investors and is said to be an ?estimate of the true economic profit.
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other
Inventory turnover ratio

15. Why are trend analysis and industry comparison important to financial ratio analysis?

16. How do you calculate the modified du pont equation?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Inventory turnover ratio
Going concern value

17. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Economic Value Added (EVA) measures the amount of profit remaining after accounting for the return expected by the firm's investors and is said to be an ?estimate of the true economic profit.
The Du Pont System of ratio analysis examines the relationships between ratios.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

18. Umbrella Corporation has total assets of $5 million and an asset turnover ratio of 4. If net income is $2 million - What is the value of the net profit margin?
Debt
Credit sales = $4000000
Market to book value ratio
Sales

19. Given $20 million in total assets - $14 million in total stockholders' equity - and a debt to total asset ratio of 30 percent for Folson Corporation - what will be the debt to equity ratio?
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
The Du Pont System of ratio analysis examines the relationships between ratios.
Inventory Turnover = 5000000/3000000 = 1.67
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

20. Boca Corporation has a return on assets ratio of 6 percent. If the debt to total assets ratio is .5 - What is the firm's return on equity?
Total asset turnover Ratio
Inventory turnover ratio
Debt
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

21. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Total Asset Turnover = Sales / Total Assets
Current and potential lenders of long-term funds - such as banks and bondholders - are interested in debt ratios. When a business's debt ratios increase significantly - bondholder and lender risk increases because more creditors compete for that firm
($100000 current assets - inventory)
Current ratio

22. One way to judge whether a firm's ratio is too high or too low is to compare it to the ratios of other firms in the industry. This is sometimes called ____________.
Cross-sectional analysis
Inventory Turnover = Sales / Inventory
Economic Value Added (EVA) measures the amount of profit remaining after accounting for the return expected by the firm's investors and is said to be an ?estimate of the true economic profit.
The Market to Book ratio is useful - but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likel

23. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Current Ratio = Current Assets / Current Liabilities
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
M/B = Market Price per Share / Book Value per Share
Financial ratios are numbers that express the value of one financial variable relative to another. They are comparative measures because they show relative value and allow the financial analysts to compare information that could not be compared in it

24. What is market value added (MVA)?
The Market to Book ratio is useful - but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likel
Market Value Added (MVA) is the market value of the firm - debt plus equity - minus the total amount of capital invested in the firm and is similar to the market to book (M/B) ratio. MVA - however focuses on total market value and total invested capi
Debt to equity ratio
Inventory Turnover = 5000000/3000000 = 1.67

25. What does the du pont system of ratio analysis examine?
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
It enables the investors to see whether the income earned was sufficient to cover their expected return. It is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return investors could get investing in other
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
The Du Pont System of ratio analysis examines the relationships between ratios.

26. ________ uses computed ratio values for several time periods and compares them.
($100000 current assets - inventory)
Trend analysis
Current Ratio = Current Assets / Current Liabilities
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

27. Jumbo Corp has a quick ratio value of 1.5. It has total current assets of $100000 and total current liabilities of $25000. If sales are $200000 - What is the value of the inventory turnover ratio?
Trend analysis uses ratios to compare a firm's past and present performance.
($100000 current assets - inventory)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Inventory Turnover = Sales / Inventory

28. What are debt ratios?

29. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Going concern value
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Net profit margin
Return on Assets = Earnings Available to Common Stockholders / Total Assets

30. Under what circumstances would market to book value ratios be misleading? Explain.
Profitability ratios measure how much company revenue is eaten up by expenses - how much a company earns relative to sales generated - and the amount earned relative to the value of the firm's assets and equity.
The Market to Book ratio is useful - but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likel
The Du Pont System of ratio analysis examines the relationships between ratios.
Market to book value ratio

31. How do you calculate EVA?

32. Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain.

33. How do you calculate return on assets? (This is a Profitability Ratio)
Net profit margin
Debt
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Current and potential lenders of long-term funds - such as banks and bondholders - are interested in debt ratios. When a business's debt ratios increase significantly - bondholder and lender risk increases because more creditors compete for that firm

34. The ___________________________tells us how efficiently the firm converts inventory to sales.
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Inventory turnover ratio
Total Asset Turnover = Sales / Total Assets

35. Why do analysts calculate financial ratios?
Going concern value
Market Value Added (MVA) is the market value of the firm - debt plus equity - minus the total amount of capital invested in the firm and is similar to the market to book (M/B) ratio. MVA - however focuses on total market value and total invested capi
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi
Average collection period

36. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Current Ratio = Current Assets / Current Liabilities
Industry analysis
Equity multiplier
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

37. What are ratios used to compare?

38. How do you calculate gross profit margin? (This is a Profitability Ratio)
Current Ratio = Current Assets / Current Liabilities
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi
Gross Profit Margin = Gross Profit / Sales
Inventory Turnover = 5000000/3000000 = 1.67

39. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Trend analysis
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

40. What do liquidity ratios measure?
Current Ratio = Current Assets / Current Liabilities
Net profit margin
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Debt to Total Assets = Total Debt / Total Assets

41. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Market to book value ratio
P/E = Market Price per Share / Earnings per Share
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
A financial ratio is a number that expresses the value of one financial variable relative to another. Put more simply - a financial ratio is the result you get when you divide one financial number by another. Calculating an individual ratio is simple

42. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current ratio
Trend analysis
Industry analysis
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

43. What is a mixed ratio?
Industry analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Cross-sectional analysis

44. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Inventory Turnover = 5000000/3000000 = 1.67
Asset Activity Ratios measure how efficiently a firm uses its assets.
Industry analysis
Current assets - inventory = $50000 - (.5

45. Explain how financial ratio analysis helps financial managers assess the health of a company.
A financial ratio is a number that expresses the value of one financial variable relative to another. Put more simply - a financial ratio is the result you get when you divide one financial number by another. Calculating an individual ratio is simple
Financial ratios are numbers that express the value of one financial variable relative to another. They are comparative measures because they show relative value and allow the financial analysts to compare information that could not be compared in it
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Operating Profit Margin = Earnings before Interest and Taxes / Sales

46. Umbrella Company has total sales of $4 million. One-fourth of these are credit sales. The amount of accounts receivable is $100000. What is the average collection period for the company? Use a 365-day year.
Credit sales = $4000000
EVA = EBIT(1-TR) - (IC x Ka) - Where: EBIT = earnings before interest and taxes - TR = the effective or average income tax rate - IC = invested capital - Ka = investors' required rate of return on their investment.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Financial ratios are numbers that express the value of one financial variable relative to another. They are comparative measures because they show relative value and allow the financial analysts to compare information that could not be compared in it

47. The ___________________________measures how efficiently a firm utilizes its assets.
Ratios are comparative measures. Because the ratios show relative value - they allow financial analysts to compare information that could not be compared in its raw form. For example - ratios may be used to compare one ratio to a related ratio - a fi
Total asset turnover Ratio
Current Ratio = Current Assets / Current Liabilities
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

48. The ____________________________measures the average return on the firm's capital contributions from its owners.
The Market to Book ratio is useful - but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likel
Trend analysis uses ratios to compare a firm's past and present performance.
Financial ratios are numbers that express the value of one financial variable relative to another. They are comparative measures because they show relative value and allow the financial analysts to compare information that could not be compared in it
Return on equity

49. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Trend analysis helps financial managers and analysts see whether a company's current financial situation is improving or deteriorating. - Cross-sectional analysis - or industry comparison - allows analysts to put the value of a firm's ratios in the c
Current Ratio = Current Assets / Current Liabilities
Debt to equity ratio
Actually - an analyst would not use the Modified Du Pont equation to calculate ROE for precisely the reason stated above. What an analyst would use the Modified Du Pont equation for is to help analyze the factors that contribute to a firm's ROE. In o

50. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Inventory turnover ratio
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
A financial ratio is a number that expresses the value of one financial variable relative to another. Put more simply - a financial ratio is the result you get when you divide one financial number by another. Calculating an individual ratio is simple
Equity multiplier