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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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. ________ uses computed ratio values for several time periods and compares them.
P/E = Market Price per Share / Earnings per Share
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.
Trend analysis


2. How do you calculate gross profit margin? (This is a Profitability Ratio)
Current assets - inventory = $50000 - (.5
Gross Profit Margin = Gross Profit / Sales
The Du Pont System of ratio analysis examines the relationships between ratios.
P/E = Market Price per Share / Earnings per Share


3. How do you calculate net profit margin? (This is a Profitability Ratio)
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Net Profit Margin = Earnings Available to Common Stockholders / Sales
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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.


4. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Asset Activity Ratios measure how efficiently a firm uses 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
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


5. What do asset activity ratios measure?
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
Asset Activity Ratios measure how efficiently a firm uses its assets.
Inventory Turnover = Sales / Inventory
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


6. Why do analysts calculate financial ratios?
Sales
Current 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
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.


7. 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
Credit sales = $4000000
($100000 current assets - inventory)
M/B = Market Price per Share / Book Value per Share


8. 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?
Inventory Turnover = 5000000/3000000 = 1.67
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Equity multiplier
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


9. Explain trend analysis.

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10. _________ (Cross-Sectional analysis) judges whether a firm's ratio is too high or too low in comparison with other firms in the industry.
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.
Gross Profit Margin = Gross Profit / Sales
Industry analysis
Net profit margin


11. How do you calculate EVA?

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12. What are ratios used to compare?

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13. What do liquidity ratios measure?
Sales
Total asset turnover Ratio
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.


14. Norman Bates Corporation has total assets of $500000. Its equity is $200000. What is the company's debt to total asset ratio?
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
The Du Pont System of ratio analysis examines the relationships between ratios.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


15. What is a mixed ratio?
Inventory Turnover = 5000000/3000000 = 1.67
Market to book value ratio
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover


16. How do you calculate the current ratio? (This is a Liquidity 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
Net profit margin
Going concern value
Current Ratio = Current Assets / Current Liabilities


17. The ___________________________measures how efficiently a firm utilizes its assets.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
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
Debt to Total Assets = Total Debt / Total Assets


18. Explain how financial ratio analysis helps financial managers assess the health of a company.
Times Interest Earned = EBIT / Interest Expense
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
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
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


19. How do you calculate the modified du pont equation?
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 = Earnings Available to Common Stockholders / Total 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.
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier


20. How do you calculate inventory turnover? (This is an Asset Activity 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
Inventory Turnover = Sales / Inventory
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


21. Under what circumstances would market to book value ratios be misleading? Explain.
Trend analysis uses ratios to compare a firm's past and present performance.
M/B = Market Price per Share / Book Value per Share
Current 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


22. 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%
Total asset turnover Ratio
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
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


23. How do you calculate return on assets? (This is a Profitability Ratio)
Cross-sectional analysis
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 = Earnings Available to Common Stockholders / Total Assets
Debt to Equity = Total Debt / Equity


24. How do you calculate the debt to total assets? (This is a Debt 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
The Du Pont System of ratio analysis examines the relationships between ratios.
Net profit margin
Debt to Total Assets = Total Debt / Total Assets


25. How do you calculate the debt to equity? (This is a Debt Ratio)
Average collection period
Debt to Equity = Total Debt / Equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Cross-sectional analysis


26. What is market value added (MVA)?
Asset Activity Ratios measure how efficiently a firm uses its assets.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Cross-sectional analysis
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


27. The ____________________________measures the average return on the firm's capital contributions from its owners.
Cross-sectional analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Return on equity


28. How do you calculate the quick ratio? (This is a Liquidity 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
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Total Asset Turnover = Sales / Total Assets


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

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30. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
Trend analysis uses ratios to compare a firm's past and present performance.
Going concern value
Total Asset Turnover = Sales / Total Assets
Equity multiplier


31. 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.
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Times Interest Earned = EBIT / Interest Expense
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.


32. How do you calculate the du pont system of ratio analysis?
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Debt
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Trend analysis


33. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
M/B = Market Price per Share / Book Value per Share
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover
Inventory Turnover = Sales / Inventory


34. What are debt ratios?

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35. How do you calculate total asset turnover? (This is an Asset Activity Ratio)
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
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 = Sales / Total Assets


36. The ___________________compares all the current assets of the firm to all the company's current liabilities.
Current 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
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Total Asset Turnover = Sales / Total Assets


37. The ___________________________is the percentage of debt relative to the amount of equity of the firm.
Debt to equity 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
Asset Activity Ratios measure how efficiently a firm uses its assets.


38. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Asset Activity Ratios measure how efficiently a firm uses its assets.
($100000 current assets - inventory)
Average collection period


39. 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?
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Inventory Turnover = Sales / Inventory
Sales
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


40. How do you calculate P/E? (This is a Market Value Ratio)
Debt to equity ratio
P/E = Market Price per Share / Earnings per Share
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


41. 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 ____________.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Cross-sectional analysis
Current assets - inventory = $50000 - (.5


42. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
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
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Average collection period


43. 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.
Asset Activity Ratios measure how efficiently a firm uses its assets.
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
P/E = Market Price per Share / Earnings per Share


44. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Current assets - inventory = $50000 - (.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
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Return on Equity = Earnings Available to Common Stockholders / Common Equity


45. The ___________________________tells us how efficiently the firm converts inventory to sales.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Inventory turnover ratio
Industry analysis


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


47. Explain the difference between the current and the quick 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
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
The quick ratio is similar to the current ratio but is a more rigorous measure of liquidity because it excludes inventory from current assets.
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.


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

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49. What does the du pont system of ratio analysis examine?
Return on equity
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
Inventory Turnover = Sales / Inventory
The Du Pont System of ratio analysis examines the relationships between ratios.


50. 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
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
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43