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

2. 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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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.

3. What do market value ratios measure?

4. What are debt ratios?

5. How do you calculate the du pont system of ratio analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
Inventory Turnover = Sales / Inventory

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

7. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Cross-sectional analysis
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

8. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Inventory Turnover = 5000000/3000000 = 1.67

9. What is market value added (MVA)?
Debt to Total Assets = Total Debt / Total Assets
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
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
Equity multiplier

10. What do liquidity ratios measure?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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 leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Net Profit Margin = Earnings Available to Common Stockholders / Sales

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

12. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Times Interest Earned = EBIT / Interest Expense
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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
Industry analysis

13. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Going concern value
Gross Profit Margin = Gross Profit / 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.
Debt

14. How do you calculate inventory turnover? (This is an Asset Activity 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
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Inventory Turnover = Sales / Inventory
Market to book value ratio

15. Explain how financial ratio analysis helps financial managers assess the health of a company.
Debt to Total Assets = Total Debt / Total Assets
Debt to Equity = Total Debt / 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
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.

16. How do you calculate return on assets? (This is a Profitability 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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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

17. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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
Equity multiplier
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

18. 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.
M/B = Market Price per Share / Book Value per Share
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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.
Debt to Total Assets = Total Debt / Total Assets

19. ________ uses computed ratio values for several time periods and compares them.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Trend analysis
Asset Activity Ratios measure how efficiently a firm uses its 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.

20. What is a financial 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
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Times Interest Earned = EBIT / Interest Expense

21. How do you calculate return on equity? (This is a Profitability Ratio)
Total Asset Turnover = Sales / Total Assets
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
Trend analysis uses ratios to compare a firm's past and present performance.
Return on Equity = Earnings Available to Common Stockholders / Common Equity

22. Explain trend analysis.

23. How do you calculate EVA?

24. 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?
Asset Activity Ratios measure how efficiently a firm uses its assets.
The Du Pont System of ratio analysis examines the relationships between ratios.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Quick Ratio = Current Assets Less Inventory / Current Liabilities

25. The ___________________________is the percentage of debt relative to the amount of equity of the 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
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt to equity ratio
Return on Assets = Earnings Available to Common Stockholders / Total Assets

26. Why do analysts calculate financial ratios?
Debt to equity 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
Times Interest Earned = EBIT / Interest Expense
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

27. 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?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Equity multiplier
Debt
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.

28. Which ratios would a potential long-term bond investor be most interested in? Explain.

29. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
Debt to Equity = Total Debt / Equity
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.
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

30. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Gross Profit Margin = Gross Profit / Sales
Sales
Market to book value ratio
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

31. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
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 uses ratios to compare a firm's past and present performance.
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

32. What do asset activity ratios measure?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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
Asset Activity Ratios measure how efficiently a firm uses its assets.
Return on equity

33. 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.
Equity multiplier
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.
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.

34. 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
Inventory turnover ratio
Trend analysis
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

35. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / 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.
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
The Du Pont System of ratio analysis examines the relationships between ratios.

36. Why is the EVA an important new tool in financial analysis?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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
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.
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

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 ____________.
Cross-sectional analysis
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Current ratio
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

38. The ___________________________tells us how efficiently the firm converts inventory to sales.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Trend 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.
Inventory turnover ratio

39. What are ratios used to compare?

40. 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?
Trend analysis
Sales
The Du Pont System of ratio analysis examines the relationships between ratios.
Inventory Turnover = Sales / Inventory

41. 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.
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.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt

42. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Total Asset Turnover = Sales / 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
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 = $500000 assets - $200000 equity = $300000 $300000 debt

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

44. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Net profit margin
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Current assets - inventory = $50000 - (.5
Asset Activity Ratios measure how efficiently a firm uses its assets.

45. How do you calculate the average collection period? (This is an Asset Activity Ratio)
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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
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

46. 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.
Market to book 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
Credit sales = $4000000
Total asset turnover Ratio

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?
Average collection period
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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

48. How do you calculate the debt to equity? (This is a Debt Ratio)
Debt to Equity = Total Debt / Equity
Going concern value
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Current ratio

49. How do you calculate the current ratio? (This is a Liquidity Ratio)
Going concern value
Sales
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Current Ratio = Current Assets / Current Liabilities

50. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Trend analysis uses ratios to compare a firm's past and present performance.
Equity multiplier
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.