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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. 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.
The Du Pont System of ratio analysis examines the relationships between ratios.
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.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Trend analysis uses ratios to compare a firm's past and present performance.

2. 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?
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
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt
Current Ratio = Current Assets / Current Liabilities

3. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Inventory Turnover = 5000000/3000000 = 1.67
Trend analysis
Operating Profit Margin = Earnings before Interest and Taxes / Sales

4. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.
Going concern value

5. 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 = Sales / Inventory
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 Total Assets = Total Debt / Total Assets

6. Explain the difference between the current and 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.
Average collection period
Trend analysis
Return on Assets = Earnings Available to Common Stockholders / Total Assets

7. How do you calculate the debt to total assets? (This is a Debt Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt to Total Assets = Total Debt / Total Assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Net Profit Margin = Earnings Available to Common Stockholders / Sales

8. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current ratio
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Inventory Turnover = 5000000/3000000 = 1.67
Asset Activity Ratios measure how efficiently a firm uses its assets.

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

10. 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?
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
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Operating Profit Margin = Earnings before Interest and Taxes / Sales

11. What is meant by the leverage effect?
Debt to equity 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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

12. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Current assets - inventory = $50000 - (.5
Return on Equity = Earnings Available to Common Stockholders / Common Equity

13. How do you calculate inventory turnover? (This is an Asset Activity 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
Equity multiplier
Debt to equity ratio
Inventory Turnover = Sales / Inventory

14. 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?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Equity multiplier
Sales
Net profit margin

15. Under what circumstances would market to book value ratios be misleading? Explain.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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
Average collection period

16. What are debt ratios?

17. 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?
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
($100000 current assets - inventory)
Current assets - inventory = $50000 - (.5
Debt

18. _________ (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
Times Interest Earned = EBIT / Interest Expense
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
Industry analysis

19. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
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.
Net profit margin
Debt
Inventory Turnover = 5000000/3000000 = 1.67

20. The ____________________________measures the average return on the firm's capital contributions from its owners.
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
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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Return on equity

21. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
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
Market to book value ratio
Equity multiplier

22. How do you calculate return on assets? (This is a Profitability Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Market to book value ratio
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Inventory turnover ratio

23. 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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
P/E = Market Price per Share / Earnings per Share
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

24. What is market value added (MVA)?
Credit sales = $4000000
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 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
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. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Debt to equity ratio
Inventory Turnover = Sales / Inventory
Current Ratio = Current Assets / Current Liabilities
Current assets - inventory = $50000 - (.5

26. ________ uses computed ratio values for several time periods and compares them.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Net profit margin
Industry analysis
Trend analysis

27. What do asset activity ratios measure?
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.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Total asset turnover Ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities

28. How do you calculate the current ratio? (This is a Liquidity Ratio)
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Current Ratio = Current Assets / Current Liabilities
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

29. 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
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

30. How do you calculate P/E? (This is a Market Value Ratio)
M/B = Market Price per Share / Book Value per Share
P/E = Market Price per Share / Earnings per Share
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 = Sales / Total Assets

31. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
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
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Credit sales = $4000000

32. What do profitability ratios measure?

33. How do you calculate operating profit margin? (This is a Profitability Ratio)
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
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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.

34. Explain trend analysis.

35. Why do analysts calculate financial ratios?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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
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

36. How do you calculate gross profit margin? (This is a Profitability Ratio)
Current Ratio = Current Assets / Current Liabilities
Gross Profit Margin = Gross Profit / Sales
Inventory turnover 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

37. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Trend analysis
Equity multiplier
Going concern value
Asset Activity Ratios measure how efficiently a firm uses its assets.

38. What do market value ratios measure?

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

40. 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.
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 = Sales / Inventory
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Net profit margin

41. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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
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
Average collection period

42. What are ratios used to compare?

43. How do you calculate the du pont system of ratio analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Industry analysis
Going concern value

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

45. How do you calculate the modified du pont equation?
Inventory turnover ratio
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
($100000 current assets - inventory)

46. Why are M/B and MVA highly correlated?
Return on equity
Total Asset Turnover = Sales / 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.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

47. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
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 = $500000 assets - $200000 equity = $300000 $300000 debt
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

48. How do you calculate the quick ratio? (This is a Liquidity 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.
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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities

49. 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 ____________.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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
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.
Cross-sectional analysis

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