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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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1. What do asset activity ratios measure?
Inventory Turnover = Sales / Inventory
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Asset Activity Ratios measure how efficiently a firm uses its assets.
Going concern value

2. How do you calculate times interest earned? (This is a Debt Ratio)
M/B = Market Price per Share / Book Value per Share
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.
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
Times Interest Earned = EBIT / Interest Expense

3. How do you calculate the average collection period? (This is an Asset Activity Ratio)
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 Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Market to book value ratio

4. What does the du pont system of ratio analysis examine?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current 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
The Du Pont System of ratio analysis examines the relationships between ratios.

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

6. Why are M/B and MVA highly correlated?
Net profit margin
Total Asset Turnover = Sales / Total 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
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.

7. The ___________________________measures how efficiently a firm utilizes its assets.
Return on equity
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
Total asset turnover Ratio

8. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Debt to equity ratio
Credit sales = $4000000
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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

9. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Total Asset Turnover = Sales / Total Assets

10. How do you calculate inventory turnover? (This is an Asset Activity 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
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Inventory Turnover = Sales / Inventory
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

11. ________ uses computed ratio values for several time periods and compares them.
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
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Trend analysis

12. 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?
Debt
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Credit sales = $4000000
Current Ratio = Current Assets / Current Liabilities

13. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Bankers and other lenders use liquidity ratios to see whether to extend short-term credit to a firm. Liquidity ratios measure the ability of a firm to meet its short-term obligations. These ratios are important because failure to pay such obligations
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Times Interest Earned = EBIT / Interest Expense

14. What is market value added (MVA)?
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Total Asset Turnover = Sales / Total Assets
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
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

15. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
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
Return on equity
Total Asset Turnover = Sales / Total Assets
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

16. What is a financial ratio?
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Total asset turnover Ratio
Trend analysis
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

17. How do you calculate return on assets? (This is a Profitability Ratio)
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt to Total Assets = Total Debt / Total Assets
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

18. 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.
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
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
Credit sales = $4000000
Debt to Equity = Total Debt / Equity

19. 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?
Sales
Market to book value ratio
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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.

20. What are ratios used to compare?

21. Why is the EVA an important new tool in financial analysis?
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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
Net profit margin

22. Explain how financial ratio analysis helps financial managers assess the health of a company.
Industry analysis
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Net profit margin

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

24. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Market to book value ratio
($100000 current assets - inventory)
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

25. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Times Interest Earned = EBIT / Interest Expense
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Current assets - inventory = $50000 - (.5
Operating Profit Margin = Earnings before Interest and Taxes / Sales

26. How do you calculate gross profit margin? (This is a Profitability Ratio)
Gross Profit Margin = Gross Profit / 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.
Cross-sectional analysis
P/E = Market Price per Share / Earnings per Share

27. Explain trend analysis.

28. How do you calculate P/E? (This is a Market Value Ratio)
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Sales
P/E = Market Price per Share / Earnings per Share
Quick Ratio = Current Assets Less Inventory / Current Liabilities

29. What do profitability ratios measure?

30. How do you calculate net profit margin? (This is a Profitability Ratio)
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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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

31. 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
Average collection period
Total Asset Turnover = Sales / Total Assets
Debt to equity ratio

32. 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.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

33. How do you calculate the debt to total assets? (This is a Debt Ratio)
Current Ratio = Current Assets / Current Liabilities
One ratio to a related ratio - The firm's performance to management's goals - The firm's past and present performance - The firm's performance to that of similar firms.
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.
Debt to Total Assets = Total Debt / Total Assets

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

35. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Current assets - inventory = $50000 - (.5
Current ratio
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

36. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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.
Industry analysis

37. 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?
Industry analysis
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales

38. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
M/B = Market Price per Share / Book Value per Share
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
Industry analysis

39. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
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.
Average collection period

40. What are debt ratios?

41. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Going concern value
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Bankers and other lenders use liquidity ratios to see whether to extend short-term credit to a firm. Liquidity ratios measure the ability of a firm to meet its short-term obligations. These ratios are important because failure to pay such obligations
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

42. The ____________________________measures the average return on the firm's capital contributions from its owners.
The Du Pont System of ratio analysis examines the relationships between ratios.
Current Ratio = Current Assets / Current Liabilities
Return on equity
Asset Activity Ratios measure how efficiently a firm uses its assets.

43. How do you calculate the du pont system of ratio analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

44. Why do analysts calculate financial ratios?
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 = Accounts Receivable / Average Daily Credit Sales
Trend analysis uses ratios to compare a firm's past and present performance.
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

45. Explain the difference between the current and the quick 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.
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.
Market to book value ratio
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

46. How do you calculate return on equity? (This is a Profitability Ratio)
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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Inventory turnover ratio

47. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Inventory Turnover = Sales / Inventory
Market to book value ratio

48. The ___________________________tells us how efficiently the firm converts inventory to sales.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Inventory turnover ratio
Average collection period
Debt to Total Assets = Total Debt / Total Assets

49. How do you calculate the debt to equity? (This is a Debt 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.
Current Ratio = Current Assets / Current Liabilities
Debt to Equity = Total Debt / Equity
Current assets - inventory = $50000 - (.5

50. Under what circumstances would market to book value ratios be misleading? Explain.
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
Bankers and other lenders use liquidity ratios to see whether to extend short-term credit to a firm. Liquidity ratios measure the ability of a firm to meet its short-term obligations. These ratios are important because failure to pay such obligations
Current assets - inventory = $50000 - (.5
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.