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. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Inventory Turnover = 5000000/3000000 = 1.67
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
($100000 current assets - inventory)
Total Asset Turnover = Sales / Total Assets


2. _________ (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
Gross Profit Margin = Gross Profit / Sales
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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


3. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
($100000 current assets - inventory)
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Average collection period
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


4. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / 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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Current Ratio = Current Assets / Current Liabilities


5. What is meant by the leverage effect?
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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


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

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7. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
Inventory turnover ratio
Equity multiplier


8. The ___________________________measures how efficiently a firm utilizes its assets.
Current 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
Total asset turnover Ratio


9. The ___________________________tells us how efficiently the firm converts inventory to sales.
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.
Sales
Inventory turnover ratio
Debt to Total Assets = Total Debt / Total Assets


10. How do you calculate the du pont system of ratio analysis?
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Market to book value ratio


11. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
Asset Activity Ratios measure how efficiently a firm uses its assets.
Equity multiplier
Industry analysis


12. Under what circumstances would market to book value ratios be misleading? Explain.
Inventory 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
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


13. 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?
Return on Equity = Earnings Available to Common Stockholders / Common 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.
Inventory Turnover = 5000000/3000000 = 1.67
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.


14. How do you calculate operating profit margin? (This is a Profitability Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Operating Profit Margin = Earnings before Interest and Taxes / Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Asset Activity Ratios measure how efficiently a firm uses its assets.


15. How do you calculate EVA?

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


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

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18. How do you calculate the current ratio? (This is a Liquidity Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Times Interest Earned = EBIT / Interest Expense
Current Ratio = Current Assets / Current Liabilities
Return on Equity = Earnings Available to Common Stockholders / Common Equity


19. How do you calculate times interest earned? (This is a Debt 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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Times Interest Earned = EBIT / Interest Expense
The Du Pont System of ratio analysis examines the relationships between ratios.


20. What do asset activity ratios measure?
Debt to Equity = Total Debt / Equity
Operating Profit Margin = Earnings before Interest and Taxes / Sales
M/B = Market Price per Share / Book Value per Share
Asset Activity Ratios measure how efficiently a firm uses its assets.


21. 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?
Average collection period
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
M/B = Market Price per Share / Book Value per Share
Sales


22. 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?
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
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.
M/B = Market Price per Share / Book Value per Share


23. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
M/B = Market Price per Share / Book Value per Share
Total Asset Turnover = Sales / Total Assets
Inventory turnover ratio


24. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Industry 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.
Current assets - inventory = $50000 - (.5


25. 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.
Debt to equity ratio
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on equity
Credit sales = $4000000


26. What are debt ratios?

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27. 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.
P/E = Market Price per Share / Earnings per Share
Average collection period
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Quick Ratio = Current Assets Less Inventory / Current Liabilities


28. Explain the difference between the current and the quick 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.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets


29. How do you calculate gross profit margin? (This is a Profitability Ratio)
Times Interest Earned = EBIT / Interest Expense
Gross Profit Margin = Gross Profit / Sales
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Operating Profit Margin = Earnings before Interest and Taxes / Sales


30. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Trend analysis uses ratios to compare a firm's past and present performance.
Going concern value
Average collection period
Debt to Total Assets = Total Debt / Total Assets


31. How do you calculate the debt to equity? (This is a Debt Ratio)
Total Asset Turnover = Sales / Total Assets
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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 Equity = Total Debt / Equity


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


33. The ____________________________measures the average return on the firm's capital contributions from its owners.
Market to book value ratio
Return on equity
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
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


34. 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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


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

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36. Why are M/B and MVA highly correlated?
Current assets - inventory = $50000 - (.5
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Times Interest Earned = EBIT / Interest Expense


37. 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
Trend analysis uses ratios to compare a firm's past and present performance.
Equity multiplier
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. 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?
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Current ratio
Industry analysis


39. Explain how financial ratio analysis helps financial managers assess the health of a company.
Debt to equity ratio
Market to book value 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
Average collection period


40. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Operating Profit Margin = Earnings before Interest and Taxes / 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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


41. What do market value ratios measure?

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42. How do you calculate return on equity? (This is a Profitability Ratio)
Current Ratio = Current Assets / Current Liabilities
Equity multiplier
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Total Asset Turnover = Sales / Total Assets


43. What is a mixed ratio?
Return on equity
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
Operating Profit Margin = Earnings before Interest and Taxes / Sales


44. 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?
Net Profit Margin = Earnings Available to Common Stockholders / Sales
($100000 current assets - inventory)
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
Operating Profit Margin = Earnings before Interest and Taxes / Sales


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

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46. 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 ____________.
Inventory Turnover = Sales / Inventory
Cross-sectional analysis
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


47. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Operating Profit Margin = Earnings before Interest and Taxes / Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt


48. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Industry analysis
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.


49. What is a financial ratio?
Industry analysis
Net profit margin
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
Equity multiplier


50. 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
Trend analysis uses ratios to compare a firm's past and present performance.
Debt to equity ratio
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.