Analysis Of Financial Statements

Instructions:

• Answer 50 questions in 15 minutes.
• If you are not ready to take this test, you can study here.
• Match each statement with the correct term.
• Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

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. What do profitability ratios measure?

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2. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
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.
Sales
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


3. Why do analysts calculate financial ratios?
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Inventory Turnover = 5000000/3000000 = 1.67
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.


4. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Industry analysis
Inventory Turnover = 5000000/3000000 = 1.67
Total asset turnover Ratio
Total Asset Turnover = Sales / Total Assets


5. What is a mixed ratio?
Going concern value
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Inventory Turnover = Sales / Inventory
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


6. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Total Asset Turnover = Sales / Total Assets
Quick Ratio = Current Assets Less Inventory / Current Liabilities
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Net profit margin


7. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Current ratio
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
($100000 current assets - inventory)
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.


8. 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?
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
($100000 current assets - inventory)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Inventory Turnover = 5000000/3000000 = 1.67


9. Explain how financial ratio analysis helps financial managers assess the health of a company.
Total Asset Turnover = Sales / Total Assets
($100000 current assets - inventory)
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
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


10. How do you calculate P/E? (This is a Market Value Ratio)
Sales
P/E = Market Price per Share / Earnings per Share
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Operating Profit Margin = Earnings before Interest and Taxes / Sales


11. How do you calculate the debt to equity? (This is a Debt Ratio)
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
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
Inventory turnover ratio


12. The ___________________________measures how efficiently a firm utilizes its assets.
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
Total asset turnover Ratio
Current assets - inventory = $50000 - (.5
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


13. The ___________________compares all the current assets of the firm to all the company's current liabilities.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Total asset turnover Ratio
Trend analysis
Current ratio


14. 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?
Current Ratio = Current Assets / Current Liabilities
Debt
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Return on equity


15. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Market to book value ratio


16. How do you calculate operating profit margin? (This is a Profitability Ratio)
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
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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


17. 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.
($100000 current assets - inventory)
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Return on Equity = Earnings Available to Common Stockholders / Common Equity


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?
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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
Sales


19. How do you calculate the modified du pont equation?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Return on equity


20. Explain the difference between the current and the quick ratio.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
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
Inventory Turnover = Sales / Inventory


21. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Inventory Turnover = Sales / Inventory
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
Current ratio
Debt to equity ratio


22. 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.
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
Net profit margin
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
Credit sales = $4000000


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

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

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25. What do liquidity ratios measure?
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


26. How do you calculate the current ratio? (This is a Liquidity Ratio)
Times Interest Earned = EBIT / Interest Expense
Current Ratio = Current Assets / Current Liabilities
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
Industry analysis


27. What is meant by the leverage effect?
($100000 current assets - inventory)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Going concern value


28. How do you calculate times interest earned? (This is a Debt Ratio)
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
M/B = Market Price per Share / Book Value per Share
Times Interest Earned = EBIT / Interest Expense
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


29. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
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
Equity multiplier
Market to book value ratio


30. How do you calculate return on assets? (This is a Profitability Ratio)
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
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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


31. How do you calculate EVA?

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32. How do you calculate the du pont system of ratio analysis?
Inventory Turnover = 5000000/3000000 = 1.67
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Trend analysis uses ratios to compare a firm's past and present performance.


33. How do you calculate return on equity? (This is a Profitability Ratio)
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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


34. 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 ____________.
Debt to equity ratio
Cross-sectional analysis
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
Return on Assets = Earnings Available to Common Stockholders / Total Assets


35. 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?
Inventory Turnover = 5000000/3000000 = 1.67
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


36. What is market value added (MVA)?
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
Trend analysis
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.


37. The ___________________________tells us how efficiently the firm converts inventory to sales.
Trend 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.
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
Inventory turnover ratio


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

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39. The ____________________________measures the average return on the firm's capital contributions from its owners.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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.
Return on equity
Cross-sectional analysis


40. Explain trend analysis.

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41. What do asset activity ratios measure?
Debt to Equity = Total Debt / Equity
Gross Profit Margin = Gross Profit / Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.
Trend analysis


42. How do you calculate gross profit margin? (This is a Profitability Ratio)
Gross Profit Margin = Gross Profit / Sales
Going concern value
Inventory Turnover = 5000000/3000000 = 1.67
Average collection period


43. What are debt ratios?

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44. 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?
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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Return on equity
Inventory Turnover = 5000000/3000000 = 1.67


45. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Net profit margin
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Going concern value


46. 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.
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.
Return on Equity = Earnings Available to Common Stockholders / Common 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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


47. 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?
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.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Return on equity
Inventory Turnover = 5000000/3000000 = 1.67


48. What do market value ratios measure?

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49. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
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.
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
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.


50. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Average collection period
Cross-sectional analysis
Equity multiplier
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