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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 $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?
Industry analysis
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Average Collection Period = Accounts Receivable / Average Daily Credit 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

2. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Credit sales = $4000000
The Du Pont System of ratio analysis examines the relationships between ratios.
Average collection period
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

3. What is a financial 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.
Gross Profit Margin = Gross Profit / Sales
Debt to equity 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

4. What do profitability ratios measure?

5. How do you calculate return on equity? (This is a Profitability Ratio)
Debt to Total Assets = Total Debt / Total Assets
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

6. How do you calculate operating profit margin? (This is a Profitability Ratio)
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

7. Explain trend analysis.

8. What do asset activity ratios measure?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
($100000 current assets - inventory)
Asset Activity Ratios measure how efficiently a firm uses its 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.

9. Why do analysts calculate financial ratios?
Sales
Debt to Total Assets = Total Debt / Total Assets
Inventory Turnover = 5000000/3000000 = 1.67
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

10. The ___________________________tells us how efficiently the firm converts inventory to sales.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
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
Inventory turnover ratio

11. How do you calculate the current ratio? (This is a Liquidity Ratio)
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
Gross Profit Margin = Gross Profit / Sales
Current Ratio = Current Assets / Current Liabilities
Current assets - inventory = $50000 - (.5

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

13. What are ratios used to compare?

14. Explain the difference between the current and the quick ratio.
Trend analysis
Equity multiplier
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 quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

15. How do you calculate times interest earned? (This is a Debt Ratio)
Times Interest Earned = EBIT / Interest Expense
Return on Equity = Earnings Available to Common Stockholders / Common Equity
P/E = Market Price per Share / Earnings per Share
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

16. What does the du pont system of ratio analysis examine?
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.
The Du Pont System of ratio analysis examines the relationships between ratios.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Gross Profit Margin = Gross Profit / Sales

17. ________ uses computed ratio values for several time periods and compares them.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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.
Trend analysis
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

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

19. How do you calculate P/E? (This is a Market Value Ratio)
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Total asset turnover Ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities
P/E = Market Price per Share / Earnings per Share

20. How do you calculate net profit margin? (This is a Profitability Ratio)
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Net Profit Margin = Earnings Available to Common Stockholders / Sales
M/B = Market Price per Share / Book Value per Share
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

21. 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.
Inventory Turnover = Sales / Inventory
Equity multiplier
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Credit sales = $4000000

22. Why are M/B and MVA highly correlated?
Debt to Total Assets = Total Debt / Total 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.
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.
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

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?
Debt
Current ratio
M/B = Market Price per Share / Book Value per Share
Current assets - inventory = $50000 - (.5

24. 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
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.
Equity multiplier
Trend analysis

25. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Trend analysis
Debt to Total Assets = Total Debt / Total Assets
Gross Profit Margin = Gross Profit / Sales

26. How do you calculate the du pont system of ratio 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
Current ratio
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
The Du Pont System of ratio analysis examines the relationships between ratios.

27. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Return on equity
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Market to book value ratio

28. The ___________________compares all the current assets of the firm to all the company's current liabilities.
M/B = Market Price per Share / Book Value per Share
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
($100000 current assets - inventory)
Current ratio

29. What is a mixed 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
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

30. How do you calculate EVA?

31. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
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.
Cross-sectional analysis
Equity multiplier

32. How do you calculate the modified du pont equation?
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
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Current Ratio = Current Assets / Current Liabilities

33. 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?
Debt
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Inventory Turnover = 5000000/3000000 = 1.67
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

34. What do liquidity ratios measure?
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
The Du Pont System of ratio analysis examines the relationships between ratios.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Operating Profit Margin = Earnings before Interest and Taxes / Sales

35. The ____________________________measures the average return on the firm's capital contributions from its owners.
Total asset turnover Ratio
Return on equity
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.
Credit sales = $4000000

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

37. 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.
Current ratio
Going concern value
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Net profit margin

38. 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
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.
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

39. How do you calculate total asset turnover? (This is an Asset Activity 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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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 = Sales / Total Assets

40. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
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 = Earnings Available to Common Stockholders / Sales
Debt to equity ratio
Times Interest Earned = EBIT / Interest Expense

41. What do market value ratios measure?

42. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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
Debt

43. Explain how financial ratio analysis helps financial managers assess the health of a company.
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.
The Du Pont System of ratio analysis examines the relationships between ratios.
Debt to equity ratio

44. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
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 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
Net profit margin
Current ratio

45. 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%
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Sales
Current ratio

46. How do you calculate the debt to equity? (This is a Debt Ratio)
Debt to Equity = Total Debt / Equity
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt

47. What are debt ratios?

48. 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 ____________.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Cross-sectional analysis
Operating Profit Margin = Earnings before Interest and Taxes / Sales
M/B = Market Price per Share / Book Value per Share

49. How do you calculate gross profit margin? (This is a Profitability Ratio)
The Du Pont System of ratio analysis examines the relationships between ratios.
Gross Profit Margin = Gross Profit / Sales
Industry analysis
Going concern value

50. Why is the EVA an important new tool in financial analysis?
Industry analysis
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.