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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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1. 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
Net profit margin
Gross Profit Margin = Gross Profit / Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

2. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Times Interest Earned = EBIT / Interest Expense
Debt to Total Assets = Total Debt / Total Assets
Inventory Turnover = Sales / Inventory
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

3. 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.
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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current Ratio = Current Assets / Current Liabilities
Average collection period

4. 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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.

5. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common Equity
M/B = Market Price per Share / Book Value per Share
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
($100000 current assets - inventory)

6. The ___________________________measures how efficiently a firm utilizes its assets.
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.
Total asset turnover Ratio
Current ratio
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

7. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Market to book value ratio
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.
Return on equity

8. The ____________________________measures the average return on the firm's capital contributions from its owners.
Return on equity
Inventory Turnover = 5000000/3000000 = 1.67
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

9. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
M/B = Market Price per Share / Book Value per Share
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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 uses ratios to compare a firm's past and present performance.

10. How do you calculate operating profit margin? (This is a Profitability Ratio)
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
Inventory Turnover = 5000000/3000000 = 1.67
Debt to equity ratio
Operating Profit Margin = Earnings before Interest and Taxes / Sales

11. How do you calculate P/E? (This is a Market Value Ratio)
Asset Activity Ratios measure how efficiently a firm uses its assets.
Return on equity
P/E = Market Price per Share / Earnings per Share
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

12. What do market value ratios measure?

13. Explain trend analysis.

14. Why are M/B and MVA highly correlated?
Market to book value ratio
Total asset turnover Ratio
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 to Equity = Total Debt / Equity

15. Why is the EVA an important new tool in financial analysis?
Gross Profit Margin = Gross Profit / Sales
Net profit margin
Times Interest Earned = EBIT / Interest Expense
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?
Equity multiplier
Cross-sectional analysis
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.

17. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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
M/B = Market Price per Share / Book Value per Share

18. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
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.
Total Asset Turnover = Sales / 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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

19. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Cross-sectional analysis
Debt to equity ratio
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.
Sales

20. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
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 quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

21. How do you calculate the du pont system of ratio analysis?
Trend analysis
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

22. How do you calculate the debt to total assets? (This is a Debt Ratio)
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.
Times Interest Earned = EBIT / Interest Expense
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

23. 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
($100000 current assets - inventory)
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Debt to Equity = Total Debt / Equity

24. 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?
Credit sales = $4000000
Going concern value
Inventory turnover ratio
Inventory Turnover = 5000000/3000000 = 1.67

25. How do you calculate the debt to equity? (This is a Debt Ratio)
Current Ratio = Current Assets / Current Liabilities
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Debt to Equity = Total Debt / Equity

26. How do you calculate gross profit margin? (This is a Profitability Ratio)
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.
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
Gross Profit Margin = Gross Profit / 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

27. 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 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
Credit sales = $4000000
Cross-sectional analysis
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

28. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Sales
Equity multiplier
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

29. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
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
Market to book value ratio
Going concern value
Cross-sectional analysis

30. 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.
Trend analysis uses ratios to compare a firm's past and present performance.
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.
Current assets - inventory = $50000 - (.5

31. 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?
Debt to Equity = Total Debt / Equity
Sales
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Industry analysis

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

33. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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.
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

34. Under what circumstances would market to book value ratios be misleading? Explain.
Current assets - inventory = $50000 - (.5
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
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 Asset Turnover = Sales / Total Assets

35. What do profitability ratios measure?

36. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
($100000 current assets - inventory)
Asset Activity Ratios measure how efficiently a firm uses its assets.

37. 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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Asset Activity Ratios measure how efficiently a firm uses its assets.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

38. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Debt to Equity = Total Debt / Equity
Industry analysis
Return on Equity = Earnings Available to Common Stockholders / Common Equity
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

39. Why do analysts calculate financial ratios?
Cross-sectional 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
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
P/E = Market Price per Share / Earnings per Share

40. How do you calculate return on assets? (This is a Profitability Ratio)
Equity multiplier
Credit sales = $4000000
M/B = Market Price per Share / Book Value per Share
Return on Assets = Earnings Available to Common Stockholders / Total Assets

41. What do liquidity ratios measure?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Trend analysis
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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

42. What is a financial ratio?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current assets - inventory = $50000 - (.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
Debt to Equity = Total Debt / Equity

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

44. How do you calculate net profit margin? (This is a Profitability Ratio)
Debt to Equity = Total Debt / Equity
Asset Activity Ratios measure how efficiently a firm uses its assets.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Industry analysis

45. 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
Inventory Turnover = 5000000/3000000 = 1.67
Gross Profit Margin = Gross Profit / 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.

46. ________ uses computed ratio values for several time periods and compares them.
Trend analysis
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

47. What are ratios used to compare?

48. The ___________________________tells us how efficiently the firm converts inventory to sales.
Current assets - inventory = $50000 - (.5
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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

49. How do you calculate the average collection period? (This is an Asset Activity 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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current Ratio = Current Assets / Current Liabilities
Average Collection Period = Accounts Receivable / Average Daily Credit Sales

50. 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.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Credit sales = $4000000
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
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