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Analysis Of Financial Statements

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Answer 50 questions in 15 minutes.
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Match each statement with the correct term.
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1. 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.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Times Interest Earned = EBIT / Interest Expense

2. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Current assets - inventory = $50000 - (.5
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Net Profit Margin = Earnings Available to Common Stockholders / Sales

3. How do you calculate the du pont system of ratio analysis?
P/E = Market Price per Share / Earnings per Share
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Net Profit Margin = Earnings Available to Common Stockholders / Sales
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

4. What are debt ratios?

5. What do market value ratios measure?

6. How do you calculate operating profit margin? (This is a Profitability Ratio)
Average collection period
Total Asset Turnover = Sales / Total Assets
($100000 current assets - inventory)
Operating Profit Margin = Earnings before Interest and Taxes / Sales

7. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Total asset turnover Ratio
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Industry analysis

8. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Current assets - inventory = $50000 - (.5
Current 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

9. Explain the difference between the current and the quick ratio.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
($100000 current assets - inventory)
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

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

11. 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?
Current Ratio = Current Assets / Current Liabilities
Average collection period
P/E = Market Price per Share / Earnings per Share
Debt

12. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Times Interest Earned = EBIT / Interest Expense
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Cross-sectional analysis
Market to book value ratio

13. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Inventory Turnover = Sales / Inventory
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
Operating Profit Margin = Earnings before Interest and Taxes / 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

14. How do you calculate the current ratio? (This is a Liquidity 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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current Ratio = Current Assets / Current Liabilities

15. What does the du pont system of ratio analysis examine?
P/E = Market Price per Share / Earnings per Share
The Du Pont System of ratio analysis examines the relationships between ratios.
Times Interest Earned = EBIT / Interest Expense
Inventory Turnover = 5000000/3000000 = 1.67

16. What is a mixed ratio?
Trend analysis
Current assets - inventory = $50000 - (.5
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

17. 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.
Average collection period
Credit sales = $4000000
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Inventory Turnover = 5000000/3000000 = 1.67

18. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.

19. How do you calculate M/B (market to book ratio)? (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
M/B = Market Price per Share / Book Value per Share
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

20. 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 ____________.
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 equity 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.

21. How do you calculate the modified du pont equation?
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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Asset Activity Ratios measure how efficiently a firm uses its assets.

22. What is a financial 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
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 Du Pont System of ratio analysis examines the relationships between ratios.
Debt

23. Explain trend analysis.

24. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Current assets - inventory = $50000 - (.5
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.

25. 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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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
Total asset turnover Ratio

26. What do asset activity ratios measure?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Asset Activity Ratios measure how efficiently a firm uses its assets.
Market to book value ratio
($100000 current assets - inventory)

27. What do liquidity ratios measure?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Debt to Equity = Total Debt / Equity
Inventory Turnover = 5000000/3000000 = 1.67
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.

28. Under what circumstances would market to book value ratios be misleading? Explain.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
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

29. What are ratios used to compare?

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

31. Why are M/B and MVA highly correlated?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.
Current assets - inventory = $50000 - (.5
Debt to Equity = Total Debt / Equity

32. Why do analysts calculate financial ratios?
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
Market to book value ratio
Return on equity
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.

33. How do you calculate P/E? (This is a Market 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.
Current Ratio = Current Assets / Current Liabilities
P/E = Market Price per Share / Earnings per Share
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

34. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / 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.
Market to book value ratio
Operating Profit Margin = Earnings before Interest and Taxes / Sales

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

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

37. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Market to book value ratio
Trend 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

38. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Total asset turnover Ratio
P/E = Market Price per Share / Earnings per Share
Going concern value
Net profit margin

39. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Return on equity
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Going concern value
Cross-sectional analysis

40. 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?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Times Interest Earned = EBIT / Interest Expense

41. ________ uses computed ratio values for several time periods and compares them.
Debt to Equity = Total Debt / Equity
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
Trend analysis

42. 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.
Debt to Equity = Total Debt / Equity
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.
Equity multiplier

43. 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
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Times Interest Earned = EBIT / Interest Expense
Return on Equity = Earnings Available to Common Stockholders / Common Equity

44. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Current 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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
P/E = Market Price per Share / Earnings per Share

45. 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?
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.
Debt to Equity = Total Debt / Equity
Inventory Turnover = 5000000/3000000 = 1.67
Sales

46. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Industry analysis
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Return on Equity = Earnings Available to Common Stockholders / Common Equity

47. What do profitability ratios measure?

48. 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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
M/B = Market Price per Share / Book Value per Share
Market to book value ratio

49. What is market value added (MVA)?
The Du Pont System of ratio analysis examines the relationships between ratios.
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

50. 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?
Total Asset Turnover = Sales / Total Assets
Inventory Turnover = 5000000/3000000 = 1.67
Inventory turnover ratio
Current assets - inventory = $50000 - (.5