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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. Why is the EVA an important new tool in financial analysis?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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.
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
Total asset turnover Ratio

2. 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
Return on equity
Debt to Total Assets = Total Debt / Total Assets

3. Explain how financial ratio analysis helps financial managers assess the health of a company.
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.
Return on 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

4. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Gross Profit Margin = Gross Profit / Sales
Current assets - inventory = $50000 - (.5
Debt to Equity = Total Debt / 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

5. Under what circumstances would market to book value ratios be misleading? Explain.
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
Gross Profit Margin = Gross Profit / Sales
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

6. What is market value added (MVA)?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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
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

7. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
($100000 current assets - inventory)
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
Operating Profit Margin = Earnings before Interest and Taxes / Sales

8. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
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
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

9. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Debt to equity ratio

10. How do you calculate the debt to total assets? (This is a Debt Ratio)
Inventory turnover ratio
Total Asset Turnover = Sales / Total Assets
Equity multiplier
Debt to Total Assets = Total Debt / Total Assets

11. 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?
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Current Ratio = Current Assets / 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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

12. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current Ratio = Current Assets / Current Liabilities
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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

13. 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?
Total Asset Turnover = Sales / Total Assets
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.
Inventory Turnover = 5000000/3000000 = 1.67
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

14. 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 ____________.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Cross-sectional analysis
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Average collection period

15. What do liquidity ratios measure?
Return on equity
Inventory turnover ratio
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

16. 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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Trend analysis
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

17. 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?
Net profit margin
Current ratio
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Sales

18. 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.
Going concern value
Cross-sectional analysis
Sales

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

20. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Market to book value ratio
Total asset turnover Ratio
Average collection period
Total Asset Turnover = Sales / Total Assets

21. The ____________________________measures the average return on the firm's capital contributions from its owners.
Inventory Turnover = 5000000/3000000 = 1.67
Return on equity
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current Ratio = Current Assets / Current Liabilities

22. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Current assets - inventory = $50000 - (.5
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

23. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Debt to Equity = Total Debt / Equity
($100000 current assets - inventory)
Industry analysis
Market to book value ratio

24. How do you calculate gross profit margin? (This is a Profitability Ratio)
Average collection period
Gross Profit Margin = Gross Profit / Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt

25. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Cross-sectional analysis
Debt to equity ratio
Going concern value
Net Profit Margin = Earnings Available to Common Stockholders / Sales

26. Explain the difference between the current and 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
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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

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

28. How do you calculate EVA?

29. What do asset activity ratios measure?
Total asset turnover 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
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt to Total Assets = Total Debt / Total Assets

30. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
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.
Trend analysis uses ratios to compare a firm's past and present performance.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Net profit margin

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

32. 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
Debt to Equity = Total Debt / 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
Trend analysis uses ratios to compare a firm's past and present performance.

33. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current ratio
Inventory turnover ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Total asset turnover Ratio

34. The ___________________________tells us how efficiently the firm converts inventory to sales.
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
Current Ratio = Current Assets / Current Liabilities
Inventory turnover ratio
Going concern value

35. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Trend analysis
Debt to Total Assets = Total Debt / Total Assets
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

36. How do you calculate the debt to equity? (This is a Debt 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
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Current assets - inventory = $50000 - (.5
Debt to Equity = Total Debt / Equity

37. How do you calculate the du pont system of ratio analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt to Equity = Total Debt / 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.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

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

39. How do you calculate the average collection period? (This is an Asset Activity 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
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
Credit sales = $4000000
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

40. How do you calculate inventory turnover? (This is an Asset Activity 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.
Inventory Turnover = Sales / Inventory
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

41. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Return on equity
Debt to equity ratio
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Market to book value ratio

42. How do you calculate times interest earned? (This is a Debt Ratio)
Debt
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
Trend analysis
Times Interest Earned = EBIT / Interest Expense

43. What is a financial 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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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

44. What are debt ratios?

45. Why are M/B and MVA highly correlated?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.
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

46. What does the du pont system of ratio analysis examine?
Net profit margin
The Du Pont System of ratio analysis examines the relationships between ratios.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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

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

48. 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.
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.
Trend analysis uses ratios to compare a firm's past and present performance.
Credit sales = $4000000
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.

49. 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?
P/E = Market Price per Share / Earnings per Share
Going concern value
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Current assets - inventory = $50000 - (.5

50. What do market value ratios measure?