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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. 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)
Debt to equity ratio
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Asset Activity Ratios measure how efficiently a firm uses its assets.

2. Explain how financial ratio analysis helps financial managers assess the health of a company.
Sales
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
Net profit margin
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

3. What do profitability ratios measure?

4. What is a financial 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.
Debt to Equity = Total Debt / Equity
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
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.

5. What do market value ratios measure?

6. The ___________________________tells us how efficiently the firm converts inventory to sales.
Current assets - inventory = $50000 - (.5
P/E = Market Price per Share / Earnings per Share
Times Interest Earned = EBIT / Interest Expense
Inventory turnover ratio

7. What is a mixed 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.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Current Ratio = Current Assets / Current Liabilities
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

8. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Going concern value
Return on Assets = Earnings Available to Common Stockholders / Total Assets
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

9. 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
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
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.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

10. How do you calculate gross profit margin? (This is a Profitability 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
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
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

11. Explain trend analysis.

12. 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?
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
Return on equity
M/B = Market Price per Share / Book Value per Share
Sales

13. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Going concern value
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

14. How do you calculate P/E? (This is a Market Value Ratio)
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
P/E = Market Price per Share / Earnings per Share
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.

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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
M/B = Market Price per Share / Book Value per Share
Net profit margin

16. 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 ____________.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Net profit margin
Trend analysis
Cross-sectional analysis

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

18. ________ uses computed ratio values for several time periods and compares them.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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 ratio
Trend analysis

19. How do you calculate the du pont system of ratio analysis?
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.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Average collection period
($100000 current assets - inventory)

20. Why do analysts calculate financial ratios?
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Asset Activity Ratios measure how efficiently a firm uses its assets.
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 mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

21. How do you calculate the debt to total assets? (This is a Debt Ratio)
Equity multiplier
Debt to Total Assets = Total Debt / Total Assets
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.

22. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
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 quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

23. 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?
Equity multiplier
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
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
Debt

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.
Equity multiplier
The Du Pont System of ratio analysis examines the relationships between ratios.
Current Ratio = Current Assets / Current Liabilities
Credit sales = $4000000

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

26. What do asset activity ratios measure?
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt
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

27. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Equity multiplier
Times Interest Earned = EBIT / Interest Expense
M/B = Market Price per Share / Book Value per Share

28. How do you calculate the current ratio? (This is a Liquidity 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.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Current Ratio = Current Assets / Current Liabilities
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

29. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Average collection period
Times Interest Earned = EBIT / Interest Expense
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

30. 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.
Going concern value
Sales
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current assets - inventory = $50000 - (.5

31. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Current ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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

32. The ____________________________measures the average return on the firm's capital contributions from its owners.
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Debt to Total Assets = Total Debt / Total Assets
Return on equity

33. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt to Total Assets = Total Debt / Total Assets
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

34. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current ratio
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
M/B = Market Price per Share / Book Value per Share
The Du Pont System of ratio analysis examines the relationships between ratios.

35. What are debt ratios?

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

37. What is market value added (MVA)?
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.
Return on Equity = Earnings Available to Common Stockholders / Common 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
Debt to Total Assets = Total Debt / Total Assets

38. 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
Going concern value
Debt to Total Assets = Total Debt / Total Assets
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

39. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Trend analysis
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Debt to equity ratio

40. Why is the EVA an important new tool in financial analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Average collection period
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

41. What does the du pont system of ratio analysis examine?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Sales
The Du Pont System of ratio analysis examines the relationships between ratios.
Trend analysis

42. Explain the difference between the current and the quick ratio.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
($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.
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.

43. 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.
Inventory turnover ratio
Industry analysis
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current ratio

44. 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.
Operating Profit Margin = Earnings before Interest and Taxes / 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.
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.

45. How do you calculate the modified du pont equation?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Times Interest Earned = EBIT / Interest Expense
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Inventory turnover ratio

46. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
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.
Times Interest Earned = EBIT / Interest Expense
Net profit margin
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

47. What do liquidity ratios measure?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current ratio

48. How do you calculate operating profit margin? (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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Gross Profit Margin = Gross Profit / Sales
Return on Assets = Earnings Available to Common Stockholders / Total Assets

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

50. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
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 to equity ratio
Total Asset Turnover = Sales / Total Assets
Inventory Turnover = 5000000/3000000 = 1.67