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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. 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.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Inventory Turnover = 5000000/3000000 = 1.67
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.

2. How do you calculate P/E? (This is a Market Value Ratio)
P/E = Market Price per Share / Earnings per Share
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Trend analysis uses ratios to compare a firm's past and present performance.
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.

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

4. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Inventory Turnover = Sales / Inventory
Debt to equity 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

5. Why are M/B and MVA highly correlated?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Sales

6. 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 liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Debt
Inventory Turnover = 5000000/3000000 = 1.67
Gross Profit Margin = Gross Profit / Sales

7. What do profitability ratios measure?

8. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
Gross Profit Margin = Gross Profit / Sales
Current Ratio = Current Assets / Current Liabilities
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

9. 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
Debt
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Cross-sectional analysis

10. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
($100000 current assets - inventory)
Average collection period
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

11. Explain the difference between the current and the quick ratio.
Inventory Turnover = Sales / Inventory
P/E = Market Price per Share / Earnings per Share
Cross-sectional 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.

12. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Total asset turnover Ratio
Sales
Equity multiplier
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

13. What is a mixed 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.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

14. What is meant by the leverage effect?
Trend analysis uses ratios to compare a firm's past and present performance.
Debt to Equity = Total Debt / Equity
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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. 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?
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.
Debt to Equity = Total Debt / Equity
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

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

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

18. 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
Average collection period
Sales
Total Asset Turnover = Sales / Total Assets

19. ________ uses computed ratio values for several time periods and compares them.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Trend analysis
Return on Assets = Earnings Available to Common Stockholders / Total Assets

20. What are ratios used to compare?

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

22. Explain trend analysis.

23. 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
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
Cross-sectional analysis

24. 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?
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Debt to Equity = Total Debt / Equity
Operating Profit Margin = Earnings before Interest and Taxes / Sales

25. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Current ratio
Net profit margin

26. What does the du pont system of ratio analysis examine?
Current assets - inventory = $50000 - (.5
Net Profit Margin = Earnings Available to Common Stockholders / Sales
The Du Pont System of ratio analysis examines the relationships between ratios.
Total Asset Turnover = Sales / Total Assets

27. How do you calculate the du pont system of ratio analysis?
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
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.
Inventory Turnover = 5000000/3000000 = 1.67

28. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Current assets - inventory = $50000 - (.5
Gross Profit Margin = Gross Profit / Sales
Times Interest Earned = EBIT / Interest Expense
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

29. How do you calculate gross profit margin? (This is a Profitability Ratio)
Total Asset Turnover = Sales / Total Assets
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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.
Gross Profit Margin = Gross Profit / Sales

30. What do asset activity ratios measure?
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
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
Asset Activity Ratios measure how efficiently a firm uses its assets.

31. How do you calculate the debt to equity? (This is a Debt Ratio)
Current ratio
Going concern value
Debt to Equity = Total Debt / Equity
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.

32. How do you calculate return on assets? (This is a Profitability Ratio)
Total Asset Turnover = Sales / Total 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.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Credit sales = $4000000

33. Explain how financial ratio analysis helps financial managers assess the health of a company.
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.
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 Ratio = Current Assets / Current Liabilities
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

34. How do you calculate EVA?

35. What are debt ratios?

36. 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
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
Trend analysis

37. The ___________________compares all the current assets of the firm to all the company's current liabilities.
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.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Gross Profit Margin = Gross Profit / Sales
Current ratio

38. 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?
($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.
Current Ratio = Current Assets / Current Liabilities
Trend analysis

39. The ___________________________tells us how efficiently the firm converts inventory to sales.
Market to book value ratio
Total Asset Turnover = Sales / Total Assets
Return on equity
Inventory turnover ratio

40. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt to Equity = Total Debt / Equity
Gross Profit Margin = Gross Profit / Sales
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

41. What do market value ratios measure?

42. What is a financial 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
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current Ratio = Current Assets / Current Liabilities

43. 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.
Cross-sectional analysis
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.
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

44. The ____________________________measures the average return on the firm's capital contributions from its owners.
Total Asset Turnover = Sales / Total Assets
Return on equity
Trend analysis uses ratios to compare a firm's past and present performance.
Current ratio

45. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Industry analysis
Net profit margin
Gross Profit Margin = Gross Profit / Sales

46. How do you calculate times interest earned? (This is a Debt Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total Asset Turnover = Sales / Total Assets
Going concern value
Times Interest Earned = EBIT / Interest Expense

47. 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?
Asset Activity Ratios measure how efficiently a firm uses its assets.
Credit sales = $4000000
Sales
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

48. What do liquidity ratios measure?
Debt
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Net Profit Margin = Earnings Available to Common Stockholders / Sales

49. How do you calculate net profit margin? (This is a Profitability 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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Total asset turnover Ratio

50. 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
Inventory Turnover = Sales / Inventory
Total asset turnover Ratio
P/E = Market Price per Share / Earnings per Share