Test your basic knowledge |

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. 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?
Cross-sectional analysis
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
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

2. Explain how financial ratio analysis helps financial managers assess the health of a company.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Inventory Turnover = 5000000/3000000 = 1.67
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
Equity multiplier

3. 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.
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

4. How do you calculate P/E? (This is a Market Value Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

5. 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?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Inventory Turnover = 5000000/3000000 = 1.67
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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

6. 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?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Debt to Total Assets = Total Debt / Total Assets
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

7. 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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Credit sales = $4000000
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
Return on Assets = Earnings Available to Common Stockholders / Total Assets

8. 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?
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
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

9. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Return on Assets = Earnings Available to Common Stockholders / Total 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
Gross Profit Margin = Gross Profit / Sales
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

10. 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?
P/E = Market Price per Share / Earnings per Share
Cross-sectional analysis
Return on equity
Sales

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

12. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Sales
M/B = Market Price per Share / Book Value per Share

13. How do you calculate operating profit margin? (This is a Profitability Ratio)
Debt to Equity = Total Debt / Equity
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Trend analysis
Net profit margin

14. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
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
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
Average collection period
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

15. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Times Interest Earned = EBIT / Interest Expense
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
Going concern value
The Du Pont System of ratio analysis examines the relationships between ratios.

16. 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.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Credit sales = $4000000
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.

17. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Industry analysis
Net profit margin
Cross-sectional analysis

18. What is market value added (MVA)?
Inventory turnover 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
Sales
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.

19. Explain trend analysis.

20. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
Going concern value
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Equity multiplier

21. ________ uses computed ratio values for several time periods and compares them.
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.
Trend analysis
Debt to equity ratio
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

22. How do you calculate gross profit margin? (This is a Profitability Ratio)
Asset Activity Ratios measure how efficiently a firm uses its assets.
Gross Profit Margin = Gross Profit / Sales
Equity multiplier
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

23. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Return on equity
Inventory Turnover = Sales / Inventory
Trend analysis
($100000 current assets - inventory)

24. How do you calculate EVA?

25. 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.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current assets - inventory = $50000 - (.5
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.

26. How do you calculate the average collection period? (This is an Asset Activity Ratio)
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Sales
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

27. How do you calculate the debt to equity? (This is a Debt Ratio)
Industry analysis
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
Total Asset Turnover = Sales / Total Assets
Debt to Equity = Total Debt / Equity

28. Why is the EVA an important new tool in financial analysis?
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.
Average collection period
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. 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
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)
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. 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.
P/E = Market Price per Share / Earnings per Share
Debt
Total Asset Turnover = Sales / Total Assets

31. How do you calculate return on assets? (This is a Profitability Ratio)
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Operating Profit Margin = Earnings before Interest and Taxes / Sales

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

33. What do asset activity ratios measure?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Going concern value
Current Ratio = Current Assets / Current Liabilities

34. What are ratios used to compare?

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

36. 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?
($100000 current assets - inventory)
Cross-sectional analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.

37. How do you calculate net profit margin? (This is a Profitability Ratio)
Inventory Turnover = Sales / Inventory
Debt
Net Profit Margin = Earnings Available to Common Stockholders / 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

38. _________ (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.
Industry analysis
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
Market to book value ratio

39. What do market value ratios measure?

40. How do you calculate return on equity? (This is a Profitability Ratio)
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
M/B = Market Price per Share / Book Value per Share
Net profit margin
Return on Equity = Earnings Available to Common Stockholders / Common Equity

41. 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 ____________.
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
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
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
Cross-sectional analysis

42. 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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Trend analysis uses ratios to compare a firm's past and present performance.

43. What do profitability ratios measure?

44. How do you calculate the modified du pont equation?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x 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
Current Ratio = Current Assets / Current Liabilities

45. How do you calculate the quick ratio? (This is a Liquidity 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.
Net profit margin
Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities

46. The ___________________________measures how efficiently a firm utilizes its assets.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Inventory Turnover = Sales / Inventory
Total asset turnover Ratio
Current assets - inventory = $50000 - (.5

47. How do you calculate the du pont system of ratio analysis?
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Debt to Equity = Total Debt / Equity
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt to Total Assets = Total Debt / Total Assets

48. 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.
Times Interest Earned = EBIT / Interest Expense
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
Going concern value

49. 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
Going concern value
Asset Activity Ratios measure how efficiently a firm uses its assets.

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