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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 the quick ratio? (This is a Liquidity Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

2. 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?
Times Interest Earned = EBIT / Interest Expense
The Du Pont System of ratio analysis examines the relationships between ratios.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

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

4. 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?
Trend analysis
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

5. How do you calculate P/E? (This is a Market Value Ratio)
P/E = Market Price per Share / Earnings per Share
Inventory turnover ratio
($100000 current assets - inventory)
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.

6. How do you calculate gross profit margin? (This is a Profitability Ratio)
Current assets - inventory = $50000 - (.5
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Gross Profit Margin = Gross Profit / Sales
Equity multiplier

7. How do you calculate the debt to equity? (This is a Debt Ratio)
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Debt to Equity = Total Debt / Equity

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

9. How do you calculate the current ratio? (This is a Liquidity Ratio)
Trend analysis
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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 Ratio = Current Assets / Current Liabilities

10. 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?
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.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
Inventory Turnover = 5000000/3000000 = 1.67

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

12. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
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
Debt to Equity = Total Debt / Equity
Going concern value

13. If one-half the current assets in ST-2 consist of inventory - What is the value of 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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Current assets - inventory = $50000 - (.5
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

14. 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.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
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
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.

15. What is market value added (MVA)?
Equity multiplier
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Credit sales = $4000000
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

16. What are ratios used to compare?

17. How do you calculate the average collection period? (This is an Asset Activity Ratio)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

18. 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.
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
Cross-sectional analysis
Debt to Equity = Total Debt / Equity
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

19. What do asset activity ratios measure?
The Du Pont System of ratio analysis examines the relationships between ratios.
Asset Activity Ratios measure how efficiently a firm uses 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
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

20. Why is the EVA an important new tool in financial analysis?
Inventory turnover ratio
Net profit margin
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

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

22. 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.
Net profit margin
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Inventory turnover ratio

23. ________ uses computed ratio values for several time periods and compares them.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Trend analysis
Asset Activity Ratios measure how efficiently a firm uses its assets.
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

24. How do you calculate net profit margin? (This is a Profitability Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

25. Under what circumstances would market to book value ratios be misleading? Explain.
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
Current assets - inventory = $50000 - (.5
Current Ratio = Current Assets / Current Liabilities
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

26. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
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
Debt to equity 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
Credit sales = $4000000

27. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
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
Credit sales = $4000000
Return on equity

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 ____________.
Cross-sectional analysis
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Sales

29. Explain trend analysis.

30. How do you calculate the du pont system of ratio analysis?
Operating Profit Margin = Earnings before Interest and Taxes / 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
Total asset turnover Ratio
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

31. The ____________________________measures the average return on the firm's capital contributions from its owners.
Trend analysis
Cross-sectional analysis
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Return on equity

32. 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 asset turnover Ratio
($100000 current assets - inventory)
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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.

33. 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
Inventory turnover ratio
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Current Ratio = Current Assets / Current Liabilities

34. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
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.
Inventory Turnover = Sales / Inventory
Inventory turnover ratio

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.
Inventory turnover ratio
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Market to book value ratio
Credit sales = $4000000

36. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Industry analysis
Net profit margin
Debt to equity ratio

37. The ___________________________measures how efficiently a firm utilizes its assets.
Total asset turnover Ratio
P/E = Market Price per Share / Earnings per Share
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current Ratio = Current Assets / Current Liabilities

38. How do you calculate the modified du pont equation?
Cross-sectional analysis
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

39. What are debt ratios?

40. How do you calculate M/B (market to book ratio)? (This is a Market Value 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
M/B = Market Price per Share / Book Value per Share
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Trend analysis

41. Explain the difference between the current and the quick ratio.
Trend analysis uses ratios to compare a firm's past and present performance.
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
Inventory Turnover = Sales / Inventory

42. What do liquidity ratios measure?
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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Equity multiplier
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.

43. What is a mixed ratio?
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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

44. What is a financial ratio?
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
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
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.

45. What does the du pont system of ratio analysis examine?
M/B = Market Price per Share / Book Value per Share
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 Du Pont System of ratio analysis examines the relationships between ratios.
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

46. What do profitability ratios measure?

47. How do you calculate times interest earned? (This is a Debt Ratio)
Inventory Turnover = Sales / Inventory
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Total asset turnover Ratio
Times Interest Earned = EBIT / Interest Expense

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

49. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt
Sales
Current ratio

50. How do you calculate operating profit margin? (This is a Profitability Ratio)
Debt to Equity = Total Debt / Equity
Asset Activity Ratios measure how efficiently a firm uses its assets.
Times Interest Earned = EBIT / Interest Expense
Operating Profit Margin = Earnings before Interest and Taxes / Sales