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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. What do market value ratios measure?

2. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Net Profit Margin = Earnings Available to Common Stockholders / 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
Debt

3. The ___________________________measures how efficiently a firm utilizes its assets.
Trend analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Total asset turnover Ratio
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

4. How do you calculate return on equity? (This is a Profitability 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
Return on equity
Going concern value
Return on Equity = Earnings Available to Common Stockholders / Common Equity

5. 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?
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Inventory Turnover = 5000000/3000000 = 1.67
Debt

6. What are ratios used to compare?

7. What do liquidity ratios measure?
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 to Equity = Total Debt / Equity
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Return on Equity = Earnings Available to Common Stockholders / Common Equity

8. How do you calculate the modified du pont equation?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Equity multiplier
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
P/E = Market Price per Share / Earnings per Share

9. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Sales
Current ratio
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt

10. What are debt ratios?

11. What is market value added (MVA)?
Return on equity
M/B = Market Price per Share / Book Value per Share
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current 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

12. 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?
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.
Sales
Return on Assets = 0.20 X 0.25 = 0.05 = 5%

13. 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
P/E = Market Price per Share / Earnings per Share
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 = Earnings Available to Common Stockholders / Sales

14. Explain the difference between the current and the quick ratio.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Return on Assets = Earnings Available to Common Stockholders / Total Assets
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Inventory Turnover = 5000000/3000000 = 1.67

15. What is meant by the leverage effect?
Asset Activity Ratios measure how efficiently a firm uses its assets.
Net profit margin
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Total asset turnover Ratio

16. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Credit sales = $4000000
Total Asset Turnover = Sales / Total Assets
Going concern value

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

18. 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?
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
Market to book value ratio
($100000 current assets - inventory)
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

19. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current ratio
M/B = Market Price per Share / Book Value per Share
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 = Sales / Inventory

20. Under what circumstances would market to book value ratios be misleading? Explain.
Total asset turnover 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
Trend analysis uses ratios to compare a firm's past and present performance.
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

21. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Gross Profit Margin = Gross Profit / Sales
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
M/B = Market Price per Share / Book Value per Share
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

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

23. How do you calculate the current ratio? (This is a Liquidity Ratio)
Equity multiplier
Current Ratio = Current Assets / Current Liabilities
Trend analysis uses ratios to compare a firm's past and present performance.
Average collection period

24. How do you calculate the du pont system of ratio analysis?
Debt to Total Assets = Total Debt / Total Assets
Going concern value
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

25. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Gross Profit Margin = Gross Profit / Sales
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%

26. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Industry analysis
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Going concern value

27. Why is the EVA an important new tool in financial analysis?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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

28. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Going concern value
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Average collection period
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.

29. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Return on equity
Net profit margin
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

30. What is a mixed 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.
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

31. What is a financial ratio?
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
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
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.

32. 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
Equity multiplier
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Debt

33. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
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 ratio
Equity multiplier
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

34. Explain how financial ratio analysis helps financial managers assess the health of a company.
Return on equity
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
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

35. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover ratio
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Asset Activity Ratios measure how efficiently a firm uses its assets.

36. Why do analysts calculate financial ratios?
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt to Total Assets = Total Debt / Total Assets
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

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
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current Ratio = Current Assets / Current Liabilities

38. How do you calculate times interest earned? (This is a Debt Ratio)
Sales
Times Interest Earned = EBIT / Interest Expense
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Inventory turnover ratio

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

40. ________ uses computed ratio values for several time periods and compares them.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
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
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

41. What does the du pont system of ratio analysis examine?
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.
Gross Profit Margin = Gross Profit / Sales
The Du Pont System of ratio analysis examines the relationships between ratios.
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.

42. 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 ____________.
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.
Current Ratio = Current Assets / Current Liabilities
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

43. How do you calculate the debt to equity? (This is a Debt 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
Debt to Total Assets = Total Debt / Total Assets
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Debt to Equity = Total Debt / Equity

44. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
The Du Pont System of ratio analysis examines the relationships between ratios.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Current assets - inventory = $50000 - (.5

45. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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

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

47. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Equity multiplier
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Quick Ratio = Current Assets Less Inventory / Current Liabilities

48. How do you calculate P/E? (This is a Market Value 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
P/E = Market Price per Share / Earnings per Share
Asset Activity Ratios measure how efficiently a firm uses its assets.
Gross Profit Margin = Gross Profit / Sales

49. Explain trend analysis.

50. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
M/B = Market Price per Share / Book Value per Share
Inventory Turnover = Sales / Inventory
Current ratio
Market to book value ratio