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 is meant by the leverage effect?
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
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
Equity multiplier


2. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current Ratio = Current Assets / Current Liabilities
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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
M/B = Market Price per Share / Book Value per Share


3. Why is the EVA an important new tool in financial 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
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.
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
Inventory Turnover = Sales / Inventory


4. Why do analysts calculate financial ratios?
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
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 uses ratios to compare a firm's past and present performance.
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


5. How do you calculate return on equity? (This is a Profitability Ratio)
Total asset turnover Ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities
The Du Pont System of ratio analysis examines the relationships between ratios.
Return on Equity = Earnings Available to Common Stockholders / Common Equity


6. What do asset activity ratios measure?
Asset Activity Ratios measure how efficiently a firm uses its 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.
Equity multiplier
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


7. How do you calculate return on assets? (This is a Profitability Ratio)
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Current Ratio = Current Assets / Current Liabilities
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Return on Assets = Earnings Available to Common Stockholders / Total Assets


8. 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.
Trend analysis
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%
Net Profit Margin = Earnings Available to Common Stockholders / Sales


9. 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?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory turnover ratio
Inventory Turnover = 5000000/3000000 = 1.67
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


10. 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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11. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Equity multiplier


12. The ___________________________tells us how efficiently the firm converts inventory to sales.
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.
Inventory turnover ratio
P/E = Market Price per Share / Earnings per Share
Debt to Total Assets = Total Debt / Total Assets


13. ________ uses computed ratio values for several time periods and compares them.
Trend analysis
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier


14. 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?
Debt to equity ratio
Debt
Average collection period
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


15. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Net profit margin
Debt to equity ratio
Return on Assets = Earnings Available to Common Stockholders / Total Assets
M/B = Market Price per Share / Book Value per Share


16. 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
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 = 5000000/3000000 = 1.67
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


17. The ___________________________measures how efficiently a firm utilizes its assets.
Debt to Total Assets = Total Debt / Total Assets
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.
Total asset turnover Ratio


18. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
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.
P/E = Market Price per Share / Earnings per Share
M/B = Market Price per Share / Book Value per Share
Industry analysis


19. What are debt ratios?

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20. The ____________________________measures the average return on the firm's capital contributions from its owners.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities
P/E = Market Price per Share / Earnings per Share
Return on equity


21. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Trend analysis uses ratios to compare a firm's past and present performance.
Going concern value
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Total asset turnover Ratio


22. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Debt to equity ratio
Inventory Turnover = Sales / Inventory
Current assets - inventory = $50000 - (.5
Credit sales = $4000000


23. 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.
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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


24. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Average collection period
Total Asset Turnover = Sales / Total 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
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. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Average collection period
The Du Pont System of ratio analysis examines the relationships between ratios.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
M/B = Market Price per Share / Book Value per Share


26. 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
Gross Profit Margin = Gross Profit / 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


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

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

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29. How do you calculate gross profit margin? (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
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Gross Profit Margin = Gross Profit / Sales
Industry analysis


30. Explain trend analysis.

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31. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share 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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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


32. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Debt to Equity = Total Debt / Equity
Equity multiplier
P/E = Market Price per Share / Earnings per Share
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


33. What do profitability ratios measure?

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34. 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?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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
($100000 current assets - inventory)


35. What are ratios used to compare?

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36. How do you calculate the du pont system of ratio analysis?
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
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.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Market to book value ratio


37. 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.
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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Trend analysis uses ratios to compare a firm's past and present performance.


38. What does the du pont system of ratio analysis examine?
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
Inventory turnover ratio
The Du Pont System of ratio analysis examines the relationships between ratios.


39. What do market value ratios measure?

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40. How do you calculate net profit margin? (This is a Profitability Ratio)
Cross-sectional analysis
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


41. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.


42. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Net profit margin
Operating Profit Margin = Earnings before Interest and Taxes / Sales


43. What is a financial ratio?
Average collection period
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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Return on equity


44. Why are M/B and MVA highly correlated?
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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Inventory Turnover = Sales / Inventory
Market to book value ratio


45. Explain how financial ratio analysis helps financial managers assess the health of a company.
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 = Current Assets / Current Liabilities
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.
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


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

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47. How do you calculate inventory turnover? (This is an Asset Activity 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
Inventory Turnover = Sales / Inventory
Market to book value ratio
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


48. How do you calculate EVA?

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49. 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
Industry analysis
Return on Assets = Earnings Available to Common Stockholders / Total Assets
The Du Pont System of ratio analysis examines the relationships between ratios.


50. How do you calculate times interest earned? (This is a Debt Ratio)
Inventory Turnover = 5000000/3000000 = 1.67
Times Interest Earned = EBIT / Interest Expense
Going concern value
Return on Equity = Earnings Available to Common Stockholders / Common Equity