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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 is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets

2. Under what circumstances would market to book value ratios be misleading? Explain.
Return on equity
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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

3. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
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
Operating Profit Margin = Earnings before Interest and Taxes / 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

4. How do you calculate EVA?

5. The ___________________________measures how efficiently a firm utilizes its assets.
Times Interest Earned = EBIT / Interest Expense
Inventory Turnover = 5000000/3000000 = 1.67
($100000 current assets - inventory)
Total asset turnover Ratio

6. How do you calculate the quick ratio? (This is a Liquidity Ratio)
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.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Market to book value ratio

7. Why do analysts calculate financial 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
Debt to Equity = Total Debt / Equity
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
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

8. How do you calculate return on equity? (This is a Profitability Ratio)
Cross-sectional analysis
Market to book value ratio
Inventory Turnover = 5000000/3000000 = 1.67
Return on Equity = Earnings Available to Common Stockholders / Common Equity

9. 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
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.
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
Credit sales = $4000000

10. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Debt
M/B = Market Price per Share / Book Value per Share

11. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common 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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
M/B = Market Price per Share / Book Value per Share

12. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Industry analysis
Net profit margin
Trend analysis uses ratios to compare a firm's past and present performance.

13. 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)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Inventory Turnover = 5000000/3000000 = 1.67

14. How do you calculate the du pont system of ratio analysis?
The Du Pont System of ratio analysis examines the relationships between ratios.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover

15. What is market value added (MVA)?
Debt to Total Assets = Total Debt / Total 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
Debt to equity ratio
Net profit margin

16. 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
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Going concern value
Average collection period

17. Why is the EVA an important new tool in financial analysis?
Credit sales = $4000000
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
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
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

18. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
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
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
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.

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.
The Du Pont System of ratio analysis examines the relationships between ratios.
Average Collection Period = Accounts Receivable / Average Daily Credit 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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.

20. How do you calculate the debt to total assets? (This is a Debt Ratio)
Market to book value ratio
Debt to equity ratio
Debt to Total Assets = Total Debt / Total Assets
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. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
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.
Times Interest Earned = EBIT / Interest Expense
Debt to equity ratio
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.

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

23. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Debt
M/B = Market Price per Share / Book Value per Share
Current assets - inventory = $50000 - (.5
Net Profit Margin = Earnings Available to Common Stockholders / Sales

24. What are debt ratios?

25. How do you calculate gross profit margin? (This is a Profitability 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
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 ratio
Gross Profit Margin = Gross Profit / Sales

26. How do you calculate return on assets? (This is a Profitability Ratio)
Return on Assets = Earnings Available to Common Stockholders / Total Assets
The Du Pont System of ratio analysis examines the relationships between ratios.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Asset Activity Ratios measure how efficiently a firm uses its assets.

27. What is meant by the leverage effect?
P/E = Market Price per Share / Earnings per Share
Sales
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Quick Ratio = Current Assets Less Inventory / Current Liabilities

28. The ___________________________tells us how efficiently the firm converts inventory to sales.
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.
Inventory turnover 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.
Quick Ratio = Current Assets Less Inventory / Current Liabilities

29. How do you calculate P/E? (This is a Market Value Ratio)
Equity multiplier
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 Du Pont System of ratio analysis examines the relationships between ratios.
P/E = Market Price per Share / Earnings per Share

30. 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?
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
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43

31. 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?
P/E = Market Price per Share / Earnings per Share
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Sales
Inventory Turnover = 5000000/3000000 = 1.67

32. 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?
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)
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

33. What do asset activity ratios measure?
Credit sales = $4000000
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.
P/E = Market Price per Share / Earnings per Share
Asset Activity Ratios measure how efficiently a firm uses its assets.

34. 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?
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt
Average collection period
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.

35. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Total Asset Turnover = Sales / Total 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 asset turnover 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

36. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Gross Profit Margin = Gross Profit / Sales
Return on equity
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Current ratio

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

38. _________ (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 = 0.20 X 0.25 = 0.05 = 5%
Industry analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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

39. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Market to book value ratio
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Debt to Equity = Total Debt / Equity
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

40. What are ratios used to compare?

41. What do market value ratios measure?

42. What do liquidity ratios measure?
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Sales
Cross-sectional analysis

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

44. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
Average collection period
Inventory Turnover = Sales / Inventory
Debt to Equity = Total Debt / 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

45. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
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
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

46. Explain the difference between the current and the quick ratio.
Total asset turnover 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.
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.

47. The ____________________________measures the average return on the firm's capital contributions from its owners.
Return on equity
Industry analysis
Sales
Net Profit Margin = Earnings Available to Common Stockholders / Sales

48. Explain how financial ratio analysis helps financial managers assess the health of a company.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
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 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

49. How do you calculate times interest earned? (This is a Debt Ratio)
Times Interest Earned = EBIT / Interest Expense
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
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Equity multiplier

50. How do you calculate the modified du pont equation?
Trend analysis uses ratios to compare a firm's past and present performance.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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.