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. What do profitability ratios measure?

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2. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Trend analysis
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.
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
Going concern value


3. 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?
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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
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 Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


4. Under what circumstances would market to book value ratios be misleading? Explain.
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.
Credit sales = $4000000
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover


5. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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
Current assets - inventory = $50000 - (.5


6. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
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
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
Industry analysis


7. How do you calculate net profit margin? (This is a Profitability Ratio)
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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.
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


8. What is meant by the leverage effect?
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
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
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
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.


9. What is a mixed ratio?
Trend analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Net profit margin
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


10. What does the du pont system of ratio analysis examine?
The Du Pont System of ratio analysis examines the relationships between ratios.
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
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


11. Explain how financial ratio analysis helps financial managers assess the health of a company.
Debt to equity 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
Times Interest Earned = EBIT / Interest Expense
Equity multiplier


12. How do you calculate the du pont system of ratio analysis?
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.
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.
Total Asset Turnover = Sales / Total Assets
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover


13. How do you calculate return on assets? (This is a Profitability 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.
Return on Assets = Earnings Available to Common Stockholders / Total Assets
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.
Quick Ratio = Current Assets Less Inventory / Current Liabilities


14. The ___________________compares all the current assets of the firm to all the company's current liabilities.
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
Current ratio
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.


15. Explain trend analysis.

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16. How do you calculate the modified du pont equation?
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Credit sales = $4000000
Industry analysis


17. 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 ratio
Inventory Turnover = Sales / Inventory
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Sales


18. How do you calculate times interest earned? (This is a Debt Ratio)
Market to book value ratio
Going concern value
Times Interest Earned = EBIT / Interest Expense
Return on Assets = 0.20 X 0.25 = 0.05 = 5%


19. 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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20. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Debt to equity ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities
M/B = Market Price per Share / Book Value per Share
Times Interest Earned = EBIT / Interest Expense


21. 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
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 Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


22. What are ratios used to compare?

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23. 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 assets - inventory = $50000 - (.5
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt
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.


24. What do liquidity ratios measure?
Market to book value ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
($100000 current assets - inventory)
Going concern value


25. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
The Du Pont System of ratio analysis examines the relationships between ratios.
Cross-sectional analysis
Current ratio
Debt to equity ratio


26. 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?
Credit sales = $4000000
Inventory Turnover = 5000000/3000000 = 1.67
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt to Total Assets = Total Debt / Total Assets


27. How do you calculate gross profit margin? (This is a Profitability Ratio)
Gross Profit Margin = Gross Profit / 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
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


28. How do you calculate EVA?

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29. 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.
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Current Ratio = Current Assets / Current Liabilities
Credit sales = $4000000
Total asset turnover Ratio


30. What do asset activity ratios measure?
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
Asset Activity Ratios measure how efficiently a firm uses its assets.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
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


31. 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
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Market Value Ratios measure the market's perception of the future earning power of a company as reflected in the stock share price.
Gross Profit Margin = Gross Profit / Sales


32. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
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
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
Inventory Turnover = 5000000/3000000 = 1.67


33. What are debt ratios?

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34. 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?
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.
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
Quick Ratio = Current Assets Less Inventory / Current Liabilities
($100000 current assets - inventory)


35. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Industry analysis
Net profit margin
Times Interest Earned = EBIT / Interest Expense
Return on Assets = Earnings Available to Common Stockholders / Total Assets


36. How do you calculate the debt to equity? (This is a Debt Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Debt to Equity = Total Debt / Equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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.


37. In the modified Du Pont equation - ROE is the product of net profit margin - total asset turnover - and the ________________________.
Equity multiplier
Return on equity
Trend analysis uses ratios to compare a firm's past and present performance.
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.


38. 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
Average collection period
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.


39. The ____________________________measures the average return on the firm's capital contributions from its owners.
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
Return on equity
Current ratio
Industry analysis


40. The ___________________________measures how efficiently a firm utilizes its 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.
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
Asset Activity Ratios measure how efficiently a firm uses its assets.
Total asset turnover Ratio


41. 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%
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
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
Trend analysis uses ratios to compare a firm's past and present performance.


42. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share 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
Market to book value ratio
Total Asset Turnover = Sales / Total Assets
The Du Pont System of ratio analysis examines the relationships between ratios.


43. How do you calculate the average collection period? (This is an Asset Activity Ratio)
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Industry analysis


44. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
Debt to Total Assets = Total Debt / Total Assets
Total asset turnover Ratio
Industry analysis
Debt


45. ________ uses computed ratio values for several time periods and compares them.
Average collection period
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
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


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

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47. The ___________________________tells us how efficiently the firm converts inventory to sales.
Inventory turnover ratio
Trend analysis
Inventory Turnover = 5000000/3000000 = 1.67
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.


48. 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 ____________.
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
Cross-sectional analysis
Going concern value
Average collection period


49. How do you calculate return on equity? (This is a Profitability Ratio)
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Return on equity
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 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


50. How do you calculate inventory turnover? (This is an Asset Activity 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 Total Assets = Total Debt / Total Assets
Inventory Turnover = Sales / Inventory
($100000 current assets - inventory)