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. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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.


2. 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 Ratio = Current Assets / Current Liabilities
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


3. Why are M/B and MVA highly correlated?
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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.
Equity multiplier
Current assets - inventory = $50000 - (.5


4. 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%
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 leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Credit sales = $4000000


5. Explain the difference between the current and the quick ratio.
Total asset turnover Ratio
Inventory turnover 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.
Market to book value ratio


6. What do asset activity ratios measure?
Current ratio
Asset Activity Ratios measure how efficiently a firm uses its assets.
Going concern value
Industry analysis


7. What do market value ratios measure?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


8. What are ratios used to compare?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


9. How do you calculate inventory turnover? (This is an Asset Activity Ratio)
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 = Sales / Inventory
The Du Pont System of ratio analysis examines the relationships between ratios.


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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


11. How do you calculate operating profit margin? (This is a Profitability Ratio)
Debt to Total Assets = Total Debt / Total Assets
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


12. The ___________________________measures how efficiently a firm utilizes its assets.
Gross Profit Margin = Gross Profit / Sales
Inventory Turnover = Sales / Inventory
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
Total asset turnover Ratio


13. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Net profit margin
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 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


14. How do you calculate times interest earned? (This is a Debt Ratio)
Times Interest Earned = EBIT / Interest Expense
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.
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.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.


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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


16. What do liquidity ratios measure?
Sales
Liquidity Ratios measure the ability of a firm to meet its short-term 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.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.


17. ________ uses computed ratio values for several time periods and compares them.
Industry analysis
M/B = Market Price per Share / Book Value per Share
Asset Activity Ratios measure how efficiently a firm uses its assets.
Trend analysis


18. What is a mixed ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
Going concern value
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.


19. How do you calculate return on equity? (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
Return on Equity = Earnings Available to Common Stockholders / Common 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
P/E = Market Price per Share / Earnings per Share


20. 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?
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Credit sales = $4000000
Debt


21. 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.
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


22. 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
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)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


23. Why is the EVA an important new tool in financial 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
Credit sales = $4000000
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current 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.


24. 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?
Debt to Total Assets = Total Debt / Total Assets
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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 leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.


25. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
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
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
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


26. What are debt ratios?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


27. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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.
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
Return on Equity = Earnings Available to Common Stockholders / Common Equity


28. 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 Ratio
Inventory Turnover = 5000000/3000000 = 1.67
Inventory turnover ratio
Debt to Total Assets = Total Debt / Total Assets


29. Explain how financial ratio analysis helps financial managers assess the health of a company.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


30. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory Turnover = Sales / Inventory
Inventory turnover ratio
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Inventory Turnover = 5000000/3000000 = 1.67


31. How do you calculate gross profit margin? (This is a Profitability Ratio)
Going concern value
Gross Profit Margin = Gross Profit / Sales
Average collection period
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


32. Explain trend analysis.

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


33. 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?
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
($100000 current assets - inventory)
Times Interest Earned = EBIT / Interest Expense
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


34. How do you calculate the du pont system of ratio analysis?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
P/E = Market Price per Share / Earnings per Share


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

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


36. How do you calculate the debt to equity? (This is a Debt Ratio)
Credit sales = $4000000
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
Debt to Equity = Total Debt / Equity
Inventory Turnover = Sales / Inventory


37. The ____________________________measures the average return on the firm's capital contributions from its owners.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Return on equity
Sales
Inventory Turnover = 5000000/3000000 = 1.67


38. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Gross Profit Margin = Gross Profit / Sales
Average collection period
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt = $500000 assets - $200000 equity = $300000 $300000 debt


39. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current assets - inventory = $50000 - (.5
Equity multiplier
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


40. How do you calculate EVA?

Warning: Invalid argument supplied for foreach() in /var/www/html/basicversity.com/show_quiz.php on line 183


41. 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
Credit sales = $4000000
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Total Asset Turnover = Sales / Total Assets


42. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Times Interest Earned = EBIT / Interest Expense
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt to Total Assets = Total Debt / Total Assets
Quick Ratio = Current Assets Less Inventory / Current Liabilities


43. The ___________________compares all the current assets of the firm to all the company's current liabilities.
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 Assets = 0.20 X 0.25 = 0.05 = 5%
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Current ratio


44. Under what circumstances would market to book value ratios be misleading? Explain.
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
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
Net profit margin


45. How do you calculate the current ratio? (This is a Liquidity Ratio)
Current Ratio = Current Assets / Current Liabilities
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Debt to equity ratio
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.


46. What does the du pont system of ratio analysis examine?
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt
Debt to Total Assets = Total Debt / Total Assets
The Du Pont System of ratio analysis examines the relationships between ratios.


47. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
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%
Debt to equity ratio
Debt to Equity = Total Debt / Equity


48. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Average collection period
Equity multiplier
M/B = Market Price per Share / Book Value per Share


49. How do you calculate the modified du pont equation?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Trend analysis uses ratios to compare a firm's past and present performance.
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
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.


50. How do you calculate P/E? (This is a Market Value 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.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
Market to book value ratio
P/E = Market Price per Share / Earnings per Share