Analysis Of Financial Statements

Instructions:

• Answer 50 questions in 15 minutes.
• If you are not ready to take this test, you can study here.
• Match each statement with the correct term.
• Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

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. What do profitability ratios measure?

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2. 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.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Quick Ratio = Current Assets Less Inventory / Current Liabilities


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

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4. How do you calculate the du pont system of ratio analysis?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
M/B = Market Price per Share / Book Value per Share


5. Explain the difference between the current and the quick 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
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 Ratio = Current Assets / Current Liabilities
Equity multiplier


6. 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?
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
Return on equity
Debt
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.


7. ________ uses computed ratio values for several time periods and compares them.
P/E = Market Price per Share / Earnings per Share
Total Asset Turnover = Sales / Total Assets
Trend analysis
Market to book value ratio


8. How do you calculate EVA?

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9. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
Market to book value ratio
P/E = Market Price per Share / Earnings per Share


10. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Average collection period
Industry analysis
Equity multiplier


11. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Inventory Turnover = Sales / Inventory
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Return on Assets = Earnings Available to Common Stockholders / Total Assets


12. 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
P/E = Market Price per Share / Earnings per Share
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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


13. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current Ratio = Current Assets / Current Liabilities
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


14. How do you calculate times interest earned? (This is a Debt 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.
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
Times Interest Earned = EBIT / Interest Expense


15. 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?
Asset Activity Ratios measure how efficiently a firm uses its assets.
($100000 current assets - inventory)
Debt
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.


16. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
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 to Equity = Total Debt / Equity
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Industry analysis


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

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18. How do you calculate gross profit margin? (This is a Profitability Ratio)
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Gross Profit Margin = Gross Profit / Sales


19. The ____________________________measures the average return on the firm's capital contributions from its owners.
Equity multiplier
Debt to Equity = Total Debt / Equity
Return on equity
Inventory Turnover = 5000000/3000000 = 1.67


20. 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?
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
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Inventory Turnover = 5000000/3000000 = 1.67
Cross-sectional analysis


21. 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
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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.
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


22. What do asset activity ratios measure?
Inventory Turnover = Sales / Inventory
Asset Activity Ratios measure how efficiently a firm uses its assets.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Debt to Total Assets = Total Debt / Total Assets


23. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Debt to Equity = Total Debt / Equity
Return on equity
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Equity multiplier


24. 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.
Net profit margin
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


25. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Market to book value ratio
Times Interest Earned = EBIT / Interest Expense
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Average collection period


26. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / 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
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales


27. Explain how financial ratio analysis helps financial managers assess the health of a company.
Going concern value
Cross-sectional analysis
Industry analysis
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


28. If one-half the current assets in ST-2 consist of inventory - What is the value of 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 = $500000 assets - $200000 equity = $300000 $300000 debt
Current assets - inventory = $50000 - (.5
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


29. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Total Asset Turnover = Sales / Total Assets
Market to book value ratio
Current Ratio = Current Assets / Current Liabilities


30. How do you calculate the modified du pont equation?
M/B = Market Price per Share / Book Value per Share
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Inventory turnover ratio


31. How do you calculate return on assets? (This is a Profitability 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
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Industry analysis
Operating Profit Margin = Earnings before Interest and Taxes / Sales


32. 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.
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


33. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
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 ratio
Current ratio
Debt to Total Assets = Total Debt / Total Assets


34. The ___________________________measures how efficiently a firm utilizes its assets.
Times Interest Earned = EBIT / Interest Expense
Equity multiplier
Debt to Equity = Total Debt / Equity
Total asset turnover Ratio


35. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Going concern value
Inventory Turnover = Sales / Inventory
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Net profit margin


36. How do you calculate the debt to equity? (This is a Debt Ratio)
Debt to Equity = Total Debt / Equity
Trend analysis uses ratios to compare a firm's past and present performance.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Current ratio


37. 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 Equity = Earnings Available to Common Stockholders / Common 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.
Market to book value ratio


38. 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
Inventory Turnover = 5000000/3000000 = 1.67
Average collection period
Total Asset Turnover = Sales / Total Assets


39. What is a financial ratio?
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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 to Total Assets = Total Debt / Total Assets
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


40. Why is the EVA an important new tool in financial analysis?
M/B = Market Price per Share / Book Value per Share
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
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.
Debt


41. Why are M/B and MVA highly correlated?
Trend 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.
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
P/E = Market Price per Share / Earnings per Share


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?
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Industry analysis
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Equity multiplier


43. What do liquidity ratios measure?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


44. How do you calculate P/E? (This is a Market Value Ratio)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Trend analysis
P/E = Market Price per Share / Earnings per Share


45. What are debt ratios?

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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.
Total asset turnover Ratio
Credit sales = $4000000
Current assets - inventory = $50000 - (.5
Current Ratio = Current Assets / Current Liabilities


47. How do you calculate return on equity? (This is a Profitability Ratio)
Industry analysis
Gross Profit Margin = Gross Profit / Sales
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities


48. What is meant by the leverage effect?
Inventory turnover ratio
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.
Trend analysis


49. Under what circumstances would market to book value ratios be misleading? Explain.
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.
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
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
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


50. 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 ____________.
M/B = Market Price per Share / Book Value per Share
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Cross-sectional analysis