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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. The ___________________compares all the current assets of the firm to all the company's current liabilities.
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
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.
Current ratio
Gross Profit Margin = Gross Profit / Sales

2. How do you calculate times interest earned? (This is a Debt Ratio)
Credit sales = $4000000
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Times Interest Earned = EBIT / Interest Expense
Quick Ratio = Current Assets Less Inventory / Current Liabilities

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

4. Why is the EVA an important new tool in financial analysis?
Inventory turnover ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

5. How do you calculate inventory turnover? (This is an Asset Activity 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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Inventory Turnover = Sales / Inventory

6. Explain how financial ratio analysis helps financial managers assess the health of a company.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

7. How do you calculate the debt to equity? (This is a Debt Ratio)
Inventory Turnover = Sales / Inventory
Debt to Equity = Total Debt / Equity
Asset Activity Ratios measure how efficiently a firm uses its assets.
Credit sales = $4000000

8. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
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.
Cross-sectional analysis
Average collection period

9. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Industry analysis
Debt to Total Assets = Total Debt / Total Assets

10. The ___________________________measures how efficiently a firm utilizes its assets.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Total asset turnover Ratio

11. How do you calculate the debt to total assets? (This is a Debt Ratio)
Debt to Total Assets = Total Debt / Total Assets
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Trend analysis uses ratios to compare a firm's past and present performance.
Inventory Turnover = Sales / Inventory

12. ________ uses computed ratio values for several time periods and compares them.
Trend analysis
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Times Interest Earned = EBIT / Interest Expense
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.

13. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
M/B = Market Price per Share / Book Value per Share
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
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

14. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Inventory Turnover = 5000000/3000000 = 1.67
Equity multiplier
($100000 current assets - inventory)
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

15. 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?
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Going concern value
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Inventory Turnover = 5000000/3000000 = 1.67

16. What do liquidity ratios measure?
Return on Assets = Earnings Available to Common Stockholders / Total 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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

17. How do you calculate the modified du pont equation?
Net profit margin
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Gross Profit Margin = Gross Profit / Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

18. Under what circumstances would market to book value ratios be misleading? Explain.
The Du Pont System of ratio analysis examines the relationships between ratios.
Gross Profit Margin = Gross Profit / 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
Trend analysis uses ratios to compare a firm's past and present performance.

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

20. How do you calculate return on assets? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Inventory Turnover = Sales / Inventory
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

21. Explain the difference between the current and the quick 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.
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
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

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.
Times Interest Earned = EBIT / Interest Expense
Equity multiplier
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.

23. 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
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.
Net profit margin
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

24. 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 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.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

25. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset 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
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
Inventory Turnover = Sales / Inventory

26. What do profitability ratios measure?

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

28. What are debt ratios?

29. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Total Asset Turnover = Sales / Total Assets
Debt to equity ratio

30. 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 = $500000 assets - $200000 equity = $300000 $300000 debt
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
Inventory Turnover = Sales / Inventory

31. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover ratio
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x 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
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.

32. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Sales
Equity multiplier
Total Asset Turnover = Sales / Total Assets
Industry analysis

33. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Average collection period
P/E = Market Price per Share / Earnings per Share
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

34. How do you calculate gross profit margin? (This is a Profitability Ratio)
Gross Profit Margin = Gross Profit / 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.
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
Debt to equity ratio

35. Explain trend analysis.

36. How do you calculate EVA?

37. What is meant by the leverage effect?
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.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
The Du Pont System of ratio analysis examines the relationships between ratios.

38. How do you calculate net profit margin? (This is a Profitability Ratio)
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
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

39. 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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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
Inventory turnover ratio
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

40. How do you calculate P/E? (This is a Market Value Ratio)
Asset Activity Ratios measure how efficiently a firm uses its assets.
Cross-sectional analysis
Trend analysis
P/E = Market Price per Share / Earnings per Share

41. The ____________________________measures the average return on the firm's capital contributions from its owners.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Current Ratio = Current Assets / Current Liabilities
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
Return on equity

42. How do you calculate the du pont system of ratio analysis?
Inventory Turnover = 5000000/3000000 = 1.67
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Cross-sectional analysis

43. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
($100000 current assets - inventory)
Market to book value ratio
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

44. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
Inventory turnover ratio
Cross-sectional analysis
Return on Assets = Earnings Available to Common Stockholders / Total Assets

45. What do market value ratios measure?

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

47. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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
Current assets - inventory = $50000 - (.5

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

49. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Sales
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.
Net profit margin
Average collection period

50. What are ratios used to compare?