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 the du pont system of ratio analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Average Collection Period = Accounts Receivable / Average Daily Credit 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.
Current ratio


2. How do you calculate times interest earned? (This is a Debt Ratio)
Cross-sectional 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.
Times Interest Earned = EBIT / Interest Expense
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier


3. 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 ratio
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Gross Profit Margin = Gross Profit / Sales
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


4. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Market to book value ratio
Total Asset Turnover = Sales / Total Assets
Debt to equity ratio


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

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6. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current assets - inventory = $50000 - (.5
Inventory turnover ratio
Return on Equity = Earnings Available to Common Stockholders / Common Equity


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


8. How do you calculate the current ratio? (This is a Liquidity Ratio)
Cross-sectional analysis
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Market to book value ratio
Current Ratio = Current Assets / Current Liabilities


9. The ___________________________tells us how efficiently the firm converts inventory to sales.
Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Inventory turnover ratio
Return on Equity = Earnings Available to Common Stockholders / Common Equity


10. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Sales
P/E = Market Price per Share / Earnings per Share
Inventory Turnover = 5000000/3000000 = 1.67
Current ratio


11. What are ratios used to compare?

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12. How do you calculate return on assets? (This is a Profitability Ratio)
Debt to Equity = Total Debt / Equity
The Du Pont System of ratio analysis examines the relationships between ratios.
Inventory Turnover = 5000000/3000000 = 1.67
Return on Assets = Earnings Available to Common Stockholders / Total Assets


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

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14. Explain the difference between the current and the quick ratio.
M/B = Market Price per Share / Book Value per Share
Debt to Total Assets = Total Debt / 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.
Industry analysis


15. 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 ____________.
Going concern value
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
P/E = Market Price per Share / Earnings per Share
Cross-sectional analysis


16. 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.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
P/E = Market Price per Share / Earnings per Share
Debt
Inventory turnover ratio


17. The ___________________________measures how efficiently a firm utilizes its assets.
($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.
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
Total asset turnover Ratio


18. 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?
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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Total asset turnover Ratio
Debt


19. 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 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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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 = Sales / Inventory


20. What is a mixed ratio?
Trend analysis uses ratios to compare a firm's past and present performance.
Average collection period
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
The Du Pont System of ratio analysis examines the relationships between ratios.


21. 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?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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.


22. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Times Interest Earned = EBIT / Interest Expense
Total Asset Turnover = Sales / Total Assets
Inventory turnover ratio
Current assets - inventory = $50000 - (.5


23. 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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24. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Times Interest Earned = EBIT / Interest Expense
M/B = Market Price per Share / Book Value per Share
Equity multiplier
Net Profit Margin = Earnings Available to Common Stockholders / Sales


25. How do you calculate the modified du pont equation?
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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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


26. What do market value ratios measure?

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27. 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?
Current assets - inventory = $50000 - (.5
Inventory Turnover = 5000000/3000000 = 1.67
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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.


28. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
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
Quick Ratio = Current Assets Less Inventory / Current Liabilities


29. What is a financial ratio?
The Du Pont System of ratio analysis examines the relationships between ratios.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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


30. Why do analysts calculate financial ratios?
Total asset turnover Ratio
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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
($100000 current assets - inventory)


31. How do you calculate the debt to total assets? (This is a Debt 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 quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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
Debt to Total Assets = Total Debt / Total Assets


32. 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.
Credit sales = $4000000
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Inventory Turnover = Sales / Inventory
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


33. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Trend analysis uses ratios to compare a firm's past and present performance.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


34. 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
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.
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
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


35. The ____________________________measures the average return on the firm's capital contributions from its owners.
Trend analysis uses ratios to compare a firm's past and present performance.
Return on equity
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.
Quick Ratio = Current Assets Less Inventory / Current Liabilities


36. Why are M/B and MVA highly correlated?
Total Asset Turnover = Sales / 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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
M/B = Market Price per Share / Book Value per Share


37. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
M/B = Market Price per Share / Book Value per Share
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


38. How do you calculate EVA?

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39. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
M/B = Market Price per Share / Book Value per Share
Going concern value
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt to Equity = Total Debt / Equity


40. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Times Interest Earned = EBIT / Interest Expense
Going concern value
Trend analysis uses ratios to compare a firm's past and present performance.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt


41. How do you calculate operating profit margin? (This is a Profitability Ratio)
M/B = Market Price per Share / Book Value per Share
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Current ratio


42. What do liquidity ratios measure?
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.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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.


43. Explain how financial ratio analysis helps financial managers assess the health of a company.
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.
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Operating Profit Margin = Earnings before Interest and Taxes / Sales


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

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45. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Market to book value ratio
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Industry analysis
M/B = Market Price per Share / Book Value per Share


46. Explain trend analysis.

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47. How do you calculate gross profit margin? (This is a Profitability 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
Inventory turnover ratio
Gross Profit Margin = Gross Profit / Sales
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


48. How do you calculate return on equity? (This is a Profitability Ratio)
Total Asset Turnover = Sales / Total Assets
Return on Equity = Earnings Available to Common Stockholders / Common Equity
($100000 current assets - inventory)
Total asset turnover Ratio


49. Under what circumstances would market to book value ratios be misleading? Explain.
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 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
Inventory Turnover = Sales / Inventory
Asset Activity Ratios measure how efficiently a firm uses its assets.


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