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Analysis Of Financial Statements

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Answer 50 questions in 15 minutes.
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Match each statement with the correct term.
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1. 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?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Trend analysis uses ratios to compare a firm's past and present performance.

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

3. Under what circumstances would market to book value ratios be misleading? Explain.
Debt to Total Assets = Total Debt / Total Assets
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
P/E = Market Price per Share / Earnings per Share
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

4. Explain how financial ratio analysis helps financial managers assess the health of a company.
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
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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Gross Profit Margin = Gross Profit / Sales

5. The ___________________compares all the current assets of the firm to all the company's current liabilities.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Current ratio
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Gross Profit Margin = Gross Profit / Sales

6. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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 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.

7. Why are M/B and MVA highly correlated?
The Du Pont System of ratio analysis examines the relationships between ratios.
Debt to Equity = Total Debt / Equity
Equity multiplier
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.

8. What are ratios used to compare?

9. How do you calculate times interest earned? (This is a Debt 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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current assets - inventory = $50000 - (.5
Times Interest Earned = EBIT / Interest Expense

10. How do you calculate the debt to total assets? (This is a Debt Ratio)
Debt to Total Assets = Total Debt / Total Assets
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Debt to Equity = Total Debt / Equity
Market to book value ratio

11. How do you calculate the du pont system of ratio analysis?
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Total asset turnover Ratio
P/E = Market Price per Share / Earnings per Share
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

12. 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
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
Inventory turnover ratio
P/E = Market Price per Share / Earnings per Share

13. 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?
Trend analysis
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Debt to Total Assets = Total Debt / Total Assets
Return on Equity = Earnings Available to Common Stockholders / Common Equity

14. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Times Interest Earned = EBIT / Interest Expense
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.
Market to book value ratio

15. How do you calculate operating profit margin? (This is a Profitability Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current ratio
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Inventory Turnover = Sales / Inventory

16. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover ratio
Times Interest Earned = EBIT / Interest Expense
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
Quick Ratio = Current Assets Less Inventory / Current Liabilities

17. What are debt ratios?

18. How do you calculate gross profit margin? (This is a Profitability Ratio)
M/B = Market Price per Share / Book Value per Share
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.
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

19. 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
Average collection period
Industry analysis
Inventory Turnover = 5000000/3000000 = 1.67

20. What is a mixed ratio?
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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Credit sales = $4000000
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

21. 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
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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities

22. 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?
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Sales
Trend analysis
Total asset turnover Ratio

23. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Net Profit Margin = Earnings Available to Common Stockholders / Sales

24. 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?
Cross-sectional analysis
Gross Profit Margin = Gross Profit / Sales
($100000 current assets - inventory)
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

25. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset 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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Trend analysis
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

26. 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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
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

27. What do profitability ratios measure?

28. 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 ____________.
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
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
Cross-sectional analysis

29. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Trend analysis uses ratios to compare a firm's past and present performance.

30. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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
Debt to Equity = Total Debt / Equity

31. ________ uses computed ratio values for several time periods and compares them.
Trend analysis
Asset Activity Ratios measure how efficiently a firm uses its assets.
Average Collection Period = Accounts Receivable / Average Daily Credit 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

32. How do you calculate EVA?

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

34. How do you calculate net profit margin? (This is a Profitability Ratio)
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
The Du Pont System of ratio analysis examines the relationships between ratios.
Net Profit Margin = Earnings Available to Common Stockholders / Sales

35. 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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory turnover 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
Debt to Equity = Total Debt / Equity

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

37. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current ratio
M/B = Market Price per Share / Book Value per Share
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

38. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
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
Going concern value
Trend analysis uses ratios to compare a firm's past and present performance.
Sales

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

40. Why is the EVA an important new tool in financial analysis?
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.
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 assets - inventory = $50000 - (.5
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

41. Explain the difference between the current and the quick ratio.
Debt
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
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.

42. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Equity multiplier
Asset Activity Ratios measure how efficiently a firm uses its assets.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Market to book value ratio

43. How do you calculate return on assets? (This is a Profitability Ratio)
Times Interest Earned = EBIT / Interest Expense
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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
Return on Assets = Earnings Available to Common Stockholders / Total Assets

44. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
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.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

45. What do market value ratios measure?

46. 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
Credit sales = $4000000
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Debt

47. What do liquidity ratios measure?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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

48. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current ratio

49. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common 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
Going concern value
Debt

50. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Sales
Equity multiplier
Inventory Turnover = Sales / Inventory
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.