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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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1. What is meant by the leverage effect?
Going concern value
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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

2. What is market value added (MVA)?
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
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
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
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

3. How do you calculate gross profit margin? (This is a Profitability Ratio)
Trend analysis uses ratios to compare a firm's past and present performance.
Return on equity
Going concern value
Gross Profit Margin = Gross Profit / Sales

4. Under what circumstances would market to book value ratios be misleading? Explain.
Equity multiplier
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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
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. 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?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Sales
Current Ratio = Current Assets / Current Liabilities
Return on Equity = Earnings Available to Common Stockholders / Common Equity

6. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Debt to Total Assets = Total Debt / Total Assets
Debt to equity ratio
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt to Equity = Total Debt / Equity

7. How do you calculate return on equity? (This is a Profitability Ratio)
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 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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Net Profit Margin = Earnings Available to Common Stockholders / Sales

8. 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.
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory Turnover = 5000000/3000000 = 1.67
Equity multiplier

9. 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.
Sales
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.

10. The difference between the firm's future earnings and liquidation value is the _____________________ 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
Total asset turnover Ratio
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Going concern value

11. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Total Asset Turnover = Sales / Total 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%.
Industry analysis

12. 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
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
Industry 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.

13. 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.
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.
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%
Market to book value ratio

14. What do market value ratios measure?

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15. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Credit sales = $4000000
Trend analysis uses ratios to compare a firm's past and present performance.
Debt to equity ratio

16. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Debt to Total Assets = Total Debt / Total Assets

17. What do profitability ratios measure?

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18. The ___________________compares all the current assets of the firm to all the company's current liabilities.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current ratio
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Quick Ratio = Current Assets Less Inventory / Current Liabilities

19. What are debt ratios?

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20. 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?
Total asset turnover Ratio
P/E = Market Price per Share / Earnings per Share
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Inventory Turnover = 5000000/3000000 = 1.67

21. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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 = Sales / Total Assets

22. 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 ____________.
Credit sales = $4000000
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Debt to equity ratio
Cross-sectional analysis

23. Why do analysts calculate financial ratios?
Return on Equity = Earnings Available to Common Stockholders / Common Equity
P/E = Market Price per Share / Earnings per Share
Going concern value
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 operating profit margin? (This is a Profitability Ratio)
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Credit sales = $4000000
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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

25. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Cross-sectional 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
Current assets - inventory = $50000 - (.5

26. What is a financial ratio?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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 = 5000000/3000000 = 1.67
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

27. How do you calculate M/B (market to book ratio)? (This is a Market Value 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
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
M/B = Market Price per Share / Book Value per Share
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

28. How do you calculate P/E? (This is a Market Value Ratio)
Trend analysis
P/E = Market Price per Share / Earnings per Share
Current Ratio = Current Assets / Current Liabilities
Net profit margin

29. 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?
Going concern value
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.
Inventory Turnover = 5000000/3000000 = 1.67
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

30. Why are M/B and MVA highly correlated?
Total asset turnover Ratio
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.
Total Asset Turnover = Sales / Total Assets
Inventory Turnover = Sales / Inventory

31. ________ uses computed ratio values for several time periods and compares them.
Inventory Turnover = 5000000/3000000 = 1.67
Trend analysis
Inventory turnover ratio
Trend analysis uses ratios to compare a firm's past and present performance.

32. How do you calculate net profit margin? (This is a Profitability Ratio)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Equity multiplier
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.

33. The ____________________________measures the average return on the firm's capital contributions from its owners.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Return on equity
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
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.

34. How do you calculate the current ratio? (This is a Liquidity 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.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Current Ratio = Current Assets / Current Liabilities
Gross Profit Margin = Gross Profit / Sales

35. Explain how financial ratio analysis helps financial managers assess the health of a company.
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
Debt to Total Assets = Total Debt / Total Assets
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

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?
Market to book value ratio
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.
Debt

37. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Net profit margin

38. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.

39. What do asset activity ratios measure?
Debt to equity ratio
Trend analysis uses ratios to compare a firm's past and present performance.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.

40. The ___________________________tells us how efficiently the firm converts inventory to sales.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Current Ratio = Current Assets / Current Liabilities
Inventory turnover ratio
Market to book value ratio

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

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42. Explain the difference between the current and the quick 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
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Sales

43. The ___________________________measures how efficiently a firm utilizes its assets.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Total asset turnover Ratio
The Du Pont System of ratio analysis examines the relationships between ratios.

44. 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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Credit sales = $4000000
Trend analysis uses ratios to compare a firm's past and present performance.
Operating Profit Margin = Earnings before Interest and Taxes / Sales

45. 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 Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
($100000 current assets - inventory)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

46. How do you calculate the debt to equity? (This is a Debt Ratio)
Credit sales = $4000000
Industry analysis
Equity multiplier
Debt to Equity = Total Debt / Equity

47. 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?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current 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.
Current assets - inventory = $50000 - (.5

48. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Current Ratio = Current Assets / 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
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
Average collection period

49. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Industry analysis
Operating Profit Margin = Earnings before Interest and Taxes / Sales

50. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Return on equity
Average Collection Period = Accounts Receivable / Average Daily Credit 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.