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. The ____________________________measures the average return on the firm's capital contributions from its owners.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Return on equity
Inventory Turnover = Sales / Inventory
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

2. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Credit sales = $4000000
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

3. How do you calculate EVA?

4. How do you calculate P/E? (This is a Market Value 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 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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
P/E = Market Price per Share / Earnings per Share

5. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Total Asset Turnover = Sales / Total Assets
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current Ratio = Current Assets / Current Liabilities

6. What is a mixed ratio?
Debt to equity ratio
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Times Interest Earned = EBIT / Interest Expense

7. 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.
Trend analysis uses ratios to compare a firm's past and present performance.
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.
Net profit margin

8. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Market to book value ratio
Inventory Turnover = Sales / Inventory
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Going concern value

9. How do you calculate the modified du pont equation?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Equity multiplier
Asset Activity Ratios measure how efficiently a firm uses its assets.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

10. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total asset turnover Ratio
Trend analysis uses ratios to compare a firm's past and present performance.
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.

11. 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.
Market to book value ratio
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

12. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Debt to Total Assets = Total Debt / 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
Total Asset Turnover = Sales / Total Assets
Trend analysis uses ratios to compare a firm's past and present performance.

13. How do you calculate the debt to total assets? (This is a Debt Ratio)
Debt to Total Assets = Total Debt / Total Assets
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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

14. 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?
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 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
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

15. Why are M/B and MVA highly correlated?
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
Industry analysis
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 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.

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

17. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover 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.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Market to book value ratio

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

19. How do you calculate return on equity? (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
($100000 current assets - inventory)
Return on Equity = Earnings Available to Common Stockholders / Common Equity

20. 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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Return on 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

21. How do you calculate gross profit margin? (This is a Profitability 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
Gross Profit Margin = Gross Profit / Sales
Debt to Total Assets = Total Debt / Total Assets

22. Explain how financial ratio analysis helps financial managers assess the health of a company.
Net profit margin
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
Times Interest Earned = EBIT / Interest Expense

23. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Gross Profit Margin = Gross Profit / Sales
Equity multiplier
Asset Activity Ratios measure how efficiently a firm uses its assets.

24. What is a financial ratio?
($100000 current assets - inventory)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

25. How do you calculate the quick ratio? (This is a Liquidity 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
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Net Profit Margin = Earnings Available to Common Stockholders / 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.

26. ________ uses computed ratio values for several time periods and compares them.
Trend analysis
Trend analysis uses ratios to compare a firm's past and present performance.
Sales
Debt

27. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Total Asset Turnover = Sales / Total Assets
Inventory Turnover = Sales / Inventory
Current ratio
Cross-sectional analysis

28. 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 ____________.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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
Cross-sectional analysis
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

29. What does the du pont system of ratio analysis examine?
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 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
The Du Pont System of ratio analysis examines the relationships between ratios.

30. Why is the EVA an important new tool in financial analysis?
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
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
Total asset turnover Ratio

31. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Market to book value ratio
Credit sales = $4000000
Gross Profit Margin = Gross Profit / Sales

32. What do market value ratios measure?

33. What is market value added (MVA)?
Credit sales = $4000000
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 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 Du Pont System of ratio analysis examines the relationships between ratios.

34. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Trend analysis
Current assets - inventory = $50000 - (.5
Asset Activity Ratios measure how efficiently a firm uses its assets.
Trend analysis uses ratios to compare a firm's past and present performance.

35. What are ratios used to compare?

36. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Industry analysis
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

37. 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?
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 liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

38. 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.
Times Interest Earned = EBIT / Interest Expense
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Debt to Equity = Total Debt / Equity
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

39. 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
Going concern value
Market to book value ratio
Average collection period

40. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Industry analysis
Average collection period
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.

41. The ___________________________measures how efficiently a firm utilizes its assets.
Industry 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.
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 Ratio

42. What are debt ratios?

43. What do profitability ratios measure?

44. What do liquidity ratios measure?
($100000 current assets - inventory)
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

45. How do you calculate times interest earned? (This is a Debt Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Times Interest Earned = EBIT / Interest Expense

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

47. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
M/B = Market Price per Share / Book Value per Share
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Market to book value 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

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

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

50. 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?
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)
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.
Debt to Equity = Total Debt / Equity