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. How do you calculate net profit margin? (This is a Profitability Ratio)
Trend analysis
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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


2. What is meant by the leverage effect?
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 leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Going concern value


3. What does the du pont system of ratio analysis examine?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
The Du Pont System of ratio analysis examines the relationships between ratios.
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


4. The ____________________________measures the average return on the firm's capital contributions from its owners.
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
Current ratio
Trend analysis


5. 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?
Debt
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
($100000 current assets - inventory)
Inventory turnover ratio


6. How do you calculate the debt to total assets? (This is a Debt Ratio)
Debt to Total Assets = Total Debt / Total Assets
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.
Credit sales = $4000000
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


7. How do you calculate EVA?

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8. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Industry analysis
Current assets - inventory = $50000 - (.5
Asset Activity Ratios measure how efficiently a firm uses its assets.
Current ratio


9. Explain the difference between the current and the quick ratio.
P/E = Market Price per Share / Earnings 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.
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.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.


10. What are debt ratios?

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11. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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.
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
Total Asset Turnover = Sales / Total Assets


12. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
Asset Activity Ratios measure how efficiently a firm uses its 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.
Net profit margin


13. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current Ratio = Current Assets / Current Liabilities
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Net profit margin
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


14. 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?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets


15. 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
Industry analysis
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
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


16. How do you calculate the average collection period? (This is an Asset Activity Ratio)
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
($100000 current assets - inventory)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


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

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

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19. ________ uses computed ratio values for several time periods and compares them.
Gross Profit Margin = Gross Profit / Sales
Trend analysis
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


20. What are ratios used to compare?

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21. How do you calculate P/E? (This is a Market Value 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
Total Asset Turnover = Sales / Total Assets
Operating Profit Margin = Earnings before Interest and Taxes / Sales
P/E = Market Price per Share / Earnings per Share


22. Explain trend analysis.

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23. What do market value ratios measure?

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24. 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.
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
Credit sales = $4000000
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current ratio


25. 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.
Going concern value
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Debt to Total Assets = Total Debt / Total Assets


26. 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
Inventory turnover ratio
Cross-sectional analysis
Going concern value


27. How do you calculate M/B (market to book ratio)? (This is a Market Value 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
P/E = Market Price per Share / Earnings per Share
M/B = Market Price per Share / Book Value per Share
Sales


28. What is market value added (MVA)?
Total Asset Turnover = Sales / Total Assets
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 liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Credit sales = $4000000


29. What do asset activity ratios measure?
Asset Activity Ratios measure how efficiently a firm uses its 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.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
M/B = Market Price per Share / Book Value per Share


30. Why is the EVA an important new tool in financial analysis?
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
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.


31. 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.
Total asset turnover Ratio
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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
Going concern value


32. 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?
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Inventory Turnover = 5000000/3000000 = 1.67


33. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
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.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Equity multiplier
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. Under what circumstances would market to book value ratios be misleading? Explain.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
Net profit margin
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


35. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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
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
Cross-sectional analysis


36. 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
Credit sales = $4000000
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Current assets - inventory = $50000 - (.5


37. 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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38. Why are M/B and MVA highly correlated?
Current Ratio = Current Assets / Current Liabilities
Inventory Turnover = 5000000/3000000 = 1.67
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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.


39. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Cross-sectional 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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


40. What is a mixed ratio?
Total Asset Turnover = Sales / Total Assets
Inventory Turnover = 5000000/3000000 = 1.67
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Debt


41. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
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
Industry analysis
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.


42. The difference between the firm's future earnings and liquidation value is the _____________________ 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 Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Going concern value
Debt to equity ratio


43. 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?
Return on equity
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Industry analysis
Return on Assets = Earnings Available to Common Stockholders / Total Assets


44. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Current assets - inventory = $50000 - (.5
Net profit margin
Asset Activity Ratios measure how efficiently a firm uses its assets.
P/E = Market Price per Share / Earnings per Share


45. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
M/B = Market Price per Share / Book Value per Share
Total asset turnover Ratio
Gross Profit Margin = Gross Profit / Sales
Market to book value ratio


46. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory Turnover = Sales / Inventory
Credit sales = $4000000
Inventory turnover ratio
Return on Equity = Earnings Available to Common Stockholders / Common Equity


47. How do you calculate gross profit margin? (This is a Profitability Ratio)
Gross Profit Margin = Gross Profit / Sales
Cross-sectional analysis
Current assets - inventory = $50000 - (.5
Inventory Turnover = 5000000/3000000 = 1.67


48. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt to Total Assets = Total Debt / Total Assets
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.


49. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
($100000 current assets - inventory)
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Return on Equity = Earnings Available to Common Stockholders / Common Equity


50. How do you calculate the du pont system of ratio analysis?
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.
Average collection period
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Total Asset Turnover = Sales / Total Assets