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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. How do you calculate operating profit margin? (This is a Profitability Ratio)
Market to book value ratio
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Inventory Turnover = Sales / Inventory
M/B = Market Price per Share / Book Value per Share

2. 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
Times Interest Earned = EBIT / Interest Expense
Equity multiplier
Net Profit Margin = Earnings Available to Common Stockholders / Sales

3. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
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
Average collection period
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt to Equity = Total Debt / Equity

4. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
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
Industry 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

5. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
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.
Credit sales = $4000000
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

6. How do you calculate P/E? (This is a Market Value Ratio)
Trend analysis uses ratios to compare a firm's past and present performance.
Inventory turnover ratio
Times Interest Earned = EBIT / Interest Expense
P/E = Market Price per Share / Earnings per Share

7. 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
Market to book value ratio
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.

8. How do you calculate the debt to equity? (This is a Debt Ratio)
Debt to Equity = Total Debt / Equity
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Total Asset Turnover = Sales / Total Assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

9. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Gross Profit Margin = Gross Profit / Sales
Sales
Cross-sectional analysis
Debt to equity ratio

10. How do you calculate times interest earned? (This is a Debt 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
Gross Profit Margin = Gross Profit / Sales
Industry analysis
Times Interest Earned = EBIT / Interest Expense

11. What are ratios used to compare?

12. Why are M/B and MVA highly correlated?
Sales
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 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.

13. How do you calculate the current ratio? (This is a Liquidity Ratio)
Equity multiplier
Return on equity
Current Ratio = Current Assets / Current Liabilities
Debt to Total Assets = Total Debt / Total Assets

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

15. Explain how financial ratio analysis helps financial managers assess the health of a company.
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
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 = Accounts Receivable / Average Daily Credit Sales
The Du Pont System of ratio analysis examines the relationships between ratios.

16. 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?
Going concern value
Inventory Turnover = 5000000/3000000 = 1.67
Trend analysis
Trend analysis uses ratios to compare a firm's past and present performance.

17. What do profitability ratios measure?

18. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Debt to equity ratio
Going concern value
Average collection period
Debt

19. Explain trend analysis.

20. 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?
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
($100000 current assets - inventory)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

21. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current assets - inventory = $50000 - (.5
Current ratio
Total asset turnover Ratio
Going concern value

22. How do you calculate net profit margin? (This is a Profitability Ratio)
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales

23. What is a mixed 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.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Total asset turnover 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

24. What do market value ratios measure?

25. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Inventory Turnover = Sales / Inventory

26. What is market value added (MVA)?
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
Gross Profit Margin = Gross Profit / 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
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

27. How do you calculate return on assets? (This is a Profitability Ratio)
Times Interest Earned = EBIT / Interest Expense
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt to equity ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

28. What do asset activity ratios measure?
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Total Asset Turnover = Sales / Total Assets
Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.

29. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
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 = Sales / Inventory

30. 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 ____________.
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
M/B = Market Price per Share / Book Value per Share
Debt to Total Assets = Total Debt / Total Assets

31. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
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
Equity multiplier
The Du Pont System of ratio analysis examines the relationships between ratios.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

32. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
M/B = Market Price per Share / Book Value per Share
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

33. How do you calculate EVA?

34. How do you calculate the quick ratio? (This is a Liquidity 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
Going concern value
Quick Ratio = Current Assets Less Inventory / Current Liabilities
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

35. 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.
Net profit margin
Credit sales = $4000000
Debt to Total Assets = Total Debt / Total Assets
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

36. 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.
Times Interest Earned = EBIT / Interest Expense
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Inventory Turnover = Sales / Inventory
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.

37. What is meant by the leverage effect?
Total Asset Turnover = Sales / Total Assets
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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
Going concern value

38. 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
Trend analysis
Net profit margin
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.

39. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
Total Asset Turnover = Sales / Total Assets
Return on 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.

40. 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.
Average collection period
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Net profit margin
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

41. Explain the difference between the current and the quick 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
M/B = Market Price per Share / Book Value per Share
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.

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

43. 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?
Sales
Return on Assets = Earnings Available to Common Stockholders / 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.
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

44. 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 Du Pont System of ratio analysis examines the relationships between ratios.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Return on equity

45. How do you calculate the du pont system of ratio analysis?
($100000 current assets - inventory)
Current ratio
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Inventory turnover ratio

46. Why do analysts calculate financial ratios?
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
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
Market to book value ratio

47. How do you calculate gross profit margin? (This is a Profitability Ratio)
P/E = Market Price per Share / Earnings per Share
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.
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

48. What are debt ratios?

49. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

50. The ___________________________tells us how efficiently the firm converts inventory to sales.
Cross-sectional analysis
Inventory turnover ratio
M/B = Market Price per Share / Book Value per Share
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier