Analysis Of Financial Statements

Instructions:

• Answer 50 questions in 15 minutes.
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• 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 ___________________compares all the current assets of the firm to all the company's current liabilities.
P/E = Market Price per Share / Earnings per Share
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Current 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.


2. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Equity multiplier
Debt = $500000 assets - $200000 equity = $300000 $300000 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
Total asset turnover Ratio


3. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Debt to equity ratio
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.


4. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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


5. 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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6. What do asset activity ratios measure?
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Asset Activity Ratios measure how efficiently a firm uses its assets.
Times Interest Earned = EBIT / Interest Expense


7. What are ratios used to compare?

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8. How do you calculate operating profit margin? (This is a Profitability Ratio)
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Inventory Turnover = Sales / Inventory
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Sales


9. What is meant by the leverage effect?
Sales
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Industry analysis
Debt to Equity = Total Debt / Equity


10. What are debt ratios?

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11. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
M/B = Market Price per Share / Book Value per Share
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Total Asset Turnover = Sales / Total Assets
Quick Ratio = Current Assets Less Inventory / Current Liabilities


12. How do you calculate net profit margin? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total Asset Turnover = Sales / Total Assets
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Trend analysis uses ratios to compare a firm's past and present performance.


13. ________ uses computed ratio values for several time periods and compares them.
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
Trend 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


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

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15. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
P/E = Market Price per Share / Earnings per Share
M/B = Market Price per Share / Book Value per Share
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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


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

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

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18. Why are M/B and MVA highly correlated?
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.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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.


19. What is market value added (MVA)?
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Equity multiplier
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.


20. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover 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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
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


21. What do liquidity ratios measure?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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.
Debt to Equity = Total Debt / Equity
Sales


22. Explain trend analysis.

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23. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Industry analysis
Average collection period
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Current ratio


24. What is a mixed ratio?
Equity multiplier
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


25. Under what circumstances would market to book value ratios be misleading? Explain.
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Equity multiplier


26. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Current assets - inventory = $50000 - (.5
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.
Debt


27. How do you calculate the debt to total assets? (This is a Debt Ratio)
Return on equity
Debt to Total Assets = Total Debt / Total Assets
Net Profit Margin = Earnings Available to Common Stockholders / 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


28. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Gross Profit Margin = Gross Profit / Sales
Trend analysis uses ratios to compare a firm's past and present performance.
Operating Profit Margin = Earnings before Interest and Taxes / Sales


29. 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 ____________.
Cross-sectional analysis
The Du Pont System of ratio analysis examines the relationships between ratios.
Inventory Turnover = 5000000/3000000 = 1.67
Inventory turnover ratio


30. Why is the EVA an important new tool in financial analysis?
M/B = Market Price per Share / Book Value per Share
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
Cross-sectional analysis
($100000 current assets - inventory)


31. How do you calculate the quick ratio? (This is a Liquidity 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
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.
P/E = Market Price per Share / Earnings per Share
Quick Ratio = Current Assets Less Inventory / Current Liabilities


32. 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?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Inventory Turnover = 5000000/3000000 = 1.67
Debt
Sales


33. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


34. What does the du pont system of ratio analysis examine?
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 Equity = Earnings Available to Common Stockholders / Common Equity
Trend analysis uses ratios to compare a firm's past and present performance.
The Du Pont System of ratio analysis examines the relationships between ratios.


35. How do you calculate the debt to equity? (This is a Debt Ratio)
Industry analysis
Credit sales = $4000000
Debt to Equity = Total Debt / Equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities


36. How do you calculate times interest earned? (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
Times Interest Earned = EBIT / Interest Expense
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


37. How do you calculate EVA?

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38. How do you calculate P/E? (This is a Market Value Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / 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.
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
P/E = Market Price per Share / Earnings per Share


39. What do market value ratios measure?

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40. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
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 equity


41. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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
Equity multiplier
Current Ratio = Current Assets / Current Liabilities


42. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Gross Profit Margin = Gross Profit / Sales
Industry analysis


43. How do you calculate the current ratio? (This is a Liquidity Ratio)
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
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
Current Ratio = Current Assets / Current Liabilities


44. What is a financial 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.
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.
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.


45. 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?
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
Total Asset Turnover = Sales / Total Assets
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.
($100000 current assets - inventory)


46. How do you calculate the modified du pont equation?
Times Interest Earned = EBIT / Interest Expense
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Debt to Total Assets = Total Debt / Total Assets
Current ratio


47. Explain the difference between the current and the quick ratio.
Industry analysis
Inventory Turnover = 5000000/3000000 = 1.67
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.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.


48. How do you calculate gross profit margin? (This is a Profitability 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
Gross Profit Margin = Gross Profit / Sales
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


49. 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.
Total asset turnover Ratio
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
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


50. The ___________________________measures how efficiently a firm utilizes its assets.
Trend analysis uses ratios to compare a firm's past and present performance.
Total asset turnover 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
Asset Activity Ratios measure how efficiently a firm uses its assets.