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. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Current Ratio = Current Assets / Current Liabilities
Current assets - inventory = $50000 - (.5
M/B = Market Price per Share / Book Value per Share
Cross-sectional analysis


2. Why do analysts calculate financial ratios?
Inventory turnover ratio
Average collection period
Current Ratio = Current Assets / Current Liabilities
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


3. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Debt to equity ratio
Inventory Turnover = Sales / Inventory
Current ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


4. 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?
Times Interest Earned = EBIT / Interest Expense
Net profit margin
($100000 current assets - 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


5. How do you calculate P/E? (This is a Market Value Ratio)
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
P/E = Market Price per Share / Earnings per Share
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Debt to Total Assets = Total Debt / Total Assets


6. What are debt ratios?

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7. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Industry analysis
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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


8. 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
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.
Net profit margin
Quick Ratio = Current Assets Less Inventory / Current Liabilities


9. How do you calculate the current ratio? (This is a Liquidity Ratio)
P/E = Market Price per Share / Earnings per Share
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Gross Profit Margin = Gross Profit / Sales
Current Ratio = Current Assets / Current Liabilities


10. How do you calculate the debt to total assets? (This is a Debt Ratio)
Debt to Total Assets = Total Debt / Total Assets
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Return on equity
Total asset turnover Ratio


11. What does the du pont system of ratio analysis examine?
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
The Du Pont System of ratio analysis examines the relationships between ratios.
Inventory Turnover = Sales / Inventory


12. How do you calculate return on equity? (This is a Profitability Ratio)
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
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.
Return on Equity = Earnings Available to Common Stockholders / Common Equity


13. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Return on equity
Total Asset Turnover = Sales / Total Assets
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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


14. 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.
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 mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


15. How do you calculate operating 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
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Going concern value


16. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Average collection period
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.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt


17. What is meant by the leverage effect?
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
Sales
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt


18. 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?
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
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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.


19. What is market value added (MVA)?
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.
Net profit margin
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
P/E = Market Price per Share / Earnings per Share


20. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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


21. 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
Return on equity
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


22. Under what circumstances would market to book value ratios be misleading? Explain.
Return on equity
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
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
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


23. Why are M/B and MVA highly correlated?
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
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
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.


24. The ___________________________measures how efficiently a firm utilizes its assets.
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Total asset turnover 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


25. What is a financial 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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Operating Profit Margin = Earnings before Interest and Taxes / Sales


26. How do you calculate the debt to equity? (This is a Debt 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 Ratio
Equity multiplier
Debt to Equity = Total Debt / Equity


27. Why is the EVA an important new tool in financial analysis?
Current assets - inventory = $50000 - (.5
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
Inventory Turnover = 5000000/3000000 = 1.67
Credit sales = $4000000


28. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Average collection period
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Going concern value
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


29. What do liquidity ratios measure?
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
M/B = Market Price per Share / Book Value per Share
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


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

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31. _________ (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
Industry analysis
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


32. The ____________________________measures the average return on the firm's capital contributions from its owners.
Total asset turnover Ratio
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Times Interest Earned = EBIT / Interest Expense
Return on equity


33. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover 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.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current Ratio = Current Assets / Current Liabilities


34. How do you calculate net profit margin? (This is a Profitability Ratio)
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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Total Asset Turnover = Sales / Total Assets


35. How do you calculate gross profit margin? (This is a Profitability Ratio)
($100000 current assets - inventory)
Gross Profit Margin = Gross Profit / Sales
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


36. What do market value ratios measure?

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37. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
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 = 5000000/3000000 = 1.67
The Du Pont System of ratio analysis examines the relationships between ratios.
Going concern value


38. 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?
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
Sales
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


39. 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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40. 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?
Debt
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
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.
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


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

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

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43. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Current ratio
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Return on Equity = Earnings Available to Common Stockholders / Common Equity


44. 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
($100000 current assets - inventory)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
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


45. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Inventory turnover ratio
Gross Profit Margin = Gross Profit / Sales
Equity multiplier
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


46. 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%.
Operating Profit Margin = Earnings before Interest and Taxes / 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.
Inventory turnover ratio


47. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Gross Profit Margin = Gross Profit / Sales
Market to book value ratio
Credit sales = $4000000
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.


48. What are ratios used to compare?

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49. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Trend analysis uses ratios to compare a firm's past and present performance.


50. Explain the difference between the current and the quick ratio.
Return on equity
Debt to Equity = Total Debt / Equity
Inventory Turnover = 5000000/3000000 = 1.67
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.