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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. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Times Interest Earned = EBIT / Interest Expense
Trend analysis uses ratios to compare a firm's past and present performance.
Inventory turnover ratio
Going concern value

2. 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?
Inventory turnover ratio
Inventory Turnover = 5000000/3000000 = 1.67
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.

3. What do liquidity ratios measure?
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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Total asset turnover Ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

4. The ____________________________measures the average return on the firm's capital contributions from its owners.
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.
Return on equity
Cross-sectional analysis
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

5. How do you calculate P/E? (This is a Market Value Ratio)
Market to book value ratio
Sales
P/E = Market Price per Share / Earnings per Share
Debt

6. Explain trend analysis.

7. 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
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.
Return on equity
Inventory turnover ratio

8. What is meant by the leverage effect?
Industry analysis
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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. Why is the EVA an important new tool in financial analysis?
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
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
Debt to Equity = Total Debt / Equity
Debt to equity ratio

10. How do you calculate the debt to total assets? (This is a Debt 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.
Debt to Total Assets = Total Debt / Total Assets
Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.

11. 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?
Total Asset Turnover = Sales / 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
($100000 current assets - inventory)
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.

12. 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?
Debt
Market to book value ratio
Total Asset Turnover = Sales / Total Assets
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

13. How do you calculate the debt to equity? (This is a Debt Ratio)
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 = $500000 assets - $200000 equity = $300000 $300000 debt
Debt to Equity = Total Debt / Equity
Industry analysis

14. How do you calculate net profit margin? (This is a Profitability Ratio)
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.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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

15. How do you calculate the current ratio? (This is a Liquidity Ratio)
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current Ratio = Current Assets / Current Liabilities
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
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

16. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
Industry analysis
Inventory Turnover = 5000000/3000000 = 1.67

17. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Current assets - inventory = $50000 - (.5
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
Equity multiplier
Net profit margin

18. ________ uses computed ratio values for several time periods and compares them.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Trend 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
Debt

19. Why are M/B and MVA highly correlated?
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.
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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.

20. 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.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Cross-sectional analysis
Equity multiplier
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

21. 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.
Debt to Total Assets = Total Debt / Total Assets
Trend analysis uses ratios to compare a firm's past and present performance.
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.

22. How do you calculate gross profit margin? (This is a Profitability Ratio)
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Gross Profit Margin = Gross Profit / Sales
The Du Pont System of ratio analysis examines the relationships between ratios.

23. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Inventory Turnover = Sales / Inventory
Market to book value ratio
Inventory turnover ratio
Inventory Turnover = 5000000/3000000 = 1.67

24. 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.
Going concern value
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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

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

26. What does the du pont system of ratio analysis examine?
Market to book value ratio
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
The Du Pont System of ratio analysis examines the relationships between ratios.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

27. Explain how financial ratio analysis helps financial managers assess the health of a company.
Debt
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Current assets - inventory = $50000 - (.5

28. 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.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on equity

29. The ___________________________measures how efficiently a firm utilizes its assets.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total asset turnover 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
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.

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

31. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Going concern value
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Current assets - inventory = $50000 - (.5

32. 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 ____________.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Trend analysis
Cross-sectional analysis
Total asset turnover Ratio

33. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Market to book value ratio
Total asset turnover Ratio
Average collection period
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.

34. Under what circumstances would market to book value ratios be misleading? Explain.
Industry analysis
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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

35. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Debt to equity ratio
Average collection period
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

36. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Asset Activity Ratios measure how efficiently a firm uses its assets.
The Du Pont System of ratio analysis examines the relationships between ratios.
Current ratio

37. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick 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
Credit sales = $4000000
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
Current assets - inventory = $50000 - (.5

38. What do profitability ratios measure?

39. Why do analysts calculate financial ratios?
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.
Asset Activity Ratios measure how efficiently a firm uses 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

40. The ___________________________tells us how efficiently the firm converts inventory to sales.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory turnover ratio
Market to book value ratio
Total Asset Turnover = Sales / Total Assets

41. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
Market to book value ratio
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Going concern value

42. 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?
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.
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
Credit sales = $4000000

43. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Total asset turnover Ratio
The Du Pont System of ratio analysis examines the relationships between ratios.

44. How do you calculate EVA?

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

46. What is a financial ratio?
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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
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
Market to book value ratio

47. How do you calculate times interest earned? (This is a Debt Ratio)
Industry analysis
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
Times Interest Earned = EBIT / Interest Expense
($100000 current assets - inventory)

48. How do you calculate the modified du pont equation?
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Debt to equity ratio
Current Ratio = Current Assets / Current Liabilities
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

49. How do you calculate return on assets? (This is a Profitability Ratio)
Debt
Return on Assets = Earnings Available to Common Stockholders / Total 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
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. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Debt to equity ratio
Total Asset Turnover = Sales / Total Assets
Gross Profit Margin = Gross Profit / Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities