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. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
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
Trend analysis
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

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

3. How do you calculate the modified du pont equation?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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
Current assets - inventory = $50000 - (.5
Inventory turnover ratio

4. Why do analysts calculate financial ratios?
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
Net profit margin
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Equity multiplier

5. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Debt to Equity = Total Debt / Equity
Inventory Turnover = Sales / Inventory
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

6. Under what circumstances would market to book value ratios be misleading? Explain.
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 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
M/B = Market Price per Share / Book Value per Share
Return on equity

7. What is a financial ratio?
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Sales
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

8. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Inventory Turnover = 5000000/3000000 = 1.67
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Going concern value
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

9. How do you calculate gross profit margin? (This is a Profitability Ratio)
Gross Profit Margin = Gross Profit / Sales
Credit sales = $4000000
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
Sales

10. 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.
Equity multiplier
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory turnover ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

11. 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
Net profit margin
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Credit sales = $4000000

12. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Current assets - inventory = $50000 - (.5
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt to Total Assets = Total Debt / Total Assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

13. Explain trend analysis.

14. 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?
Industry analysis
Debt
Sales
Cross-sectional analysis

15. How do you calculate net 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.
Total Asset Turnover = Sales / Total Assets
Current Ratio = Current Assets / Current Liabilities
Net Profit Margin = Earnings Available to Common Stockholders / Sales

16. What does the du pont system of ratio analysis examine?
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
The Du Pont System of ratio analysis examines the relationships between ratios.
Cross-sectional analysis
Debt to equity ratio

17. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current ratio
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Inventory Turnover = 5000000/3000000 = 1.67

18. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Net Profit Margin = Earnings Available to Common Stockholders / Sales
($100000 current assets - inventory)

19. 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?
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.
P/E = Market Price per Share / Earnings per Share
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Sales

20. ________ uses computed ratio values for several time periods and compares them.
Inventory turnover ratio
Trend analysis
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 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

21. 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.
Trend analysis uses ratios to compare a firm's past and present performance.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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

22. What do asset activity ratios measure?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Asset Activity Ratios measure how efficiently a firm uses its 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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

23. 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?
Inventory Turnover = 5000000/3000000 = 1.67
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.
Operating Profit Margin = Earnings before Interest and Taxes / Sales

24. How do you calculate the debt to total assets? (This is a Debt Ratio)
Cross-sectional analysis
Current Ratio = Current Assets / Current Liabilities
Debt to Total Assets = Total Debt / Total Assets
Quick Ratio = Current Assets Less Inventory / Current Liabilities

25. What are debt ratios?

26. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Debt to equity ratio
($100000 current assets - inventory)
M/B = Market Price per Share / Book Value per Share
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

27. The ___________________________tells us how efficiently the firm converts inventory to sales.
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
Inventory turnover ratio

28. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Industry analysis
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
Cross-sectional analysis

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

30. 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?
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Current assets - inventory = $50000 - (.5
Sales

31. How do you calculate times interest earned? (This is a Debt Ratio)
Times Interest Earned = EBIT / Interest Expense
Current assets - inventory = $50000 - (.5
Gross Profit Margin = Gross Profit / Sales
The Du Pont System of ratio analysis examines the relationships between ratios.

32. 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
Gross Profit Margin = Gross Profit / Sales
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

33. How do you calculate EVA?

34. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Going concern value
Inventory turnover ratio
Debt to Equity = Total Debt / Equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities

35. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Sales
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
Trend analysis uses ratios to compare a firm's past and present performance.

36. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Net Profit Margin = Earnings Available to Common Stockholders / 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
Current assets - inventory = $50000 - (.5
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

37. 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 ____________.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Cross-sectional analysis
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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

38. What do market value ratios measure?

39. What are ratios used to compare?

40. What is meant by the leverage effect?
Total Asset Turnover = Sales / Total Assets
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Current assets - inventory = $50000 - (.5
Debt to Equity = Total Debt / Equity

41. 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)
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.
Trend analysis

42. What is a mixed ratio?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Net profit margin

43. 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.
Credit sales = $4000000
Total asset turnover Ratio
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

44. 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.
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
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 Assets = 0.20 X 0.25 = 0.05 = 5%
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

45. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Net profit margin
Average collection period
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Times Interest Earned = EBIT / Interest Expense

46. 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 Total Assets = Total Debt / 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
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

47. How do you calculate the debt to equity? (This is a Debt Ratio)
Times Interest Earned = EBIT / Interest Expense
Net profit margin
Debt to Equity = Total Debt / Equity
M/B = Market Price per Share / Book Value per Share

48. How do you calculate return on equity? (This is a Profitability Ratio)
Average collection period
Inventory Turnover = Sales / Inventory
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

49. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current Ratio = Current Assets / Current Liabilities
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Total Asset Turnover = Sales / Total Assets
Net profit margin

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