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 ___________________compares all the current assets of the firm to all the company's current liabilities.
Inventory Turnover = 5000000/3000000 = 1.67
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
Current ratio
Gross Profit Margin = Gross Profit / Sales


2. 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?
Debt to equity 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
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.
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets


3. ________ uses computed ratio values for several time periods and compares them.
Total Asset Turnover = Sales / Total Assets
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Trend analysis
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


4. Under what circumstances would market to book value ratios be misleading? Explain.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Inventory Turnover = Sales / Inventory
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
Sales


5. 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 to equity ratio
Current assets - inventory = $50000 - (.5
Return on Assets = 0.20 X 0.25 = 0.05 = 5%
Credit sales = $4000000


6. The ___________________________is the market price per share of a company's common stock divided by the accounting book-value-per-share ratio.
Operating Profit Margin = Earnings before Interest and Taxes / Sales
M/B = Market Price per Share / Book Value per Share
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier
Market to book value ratio


7. Explain how financial ratio analysis helps financial managers assess the health of a company.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
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
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier


8. What do asset activity ratios measure?
Trend analysis
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Net profit margin


9. How do you calculate operating profit margin? (This is a Profitability Ratio)
Operating Profit Margin = Earnings before Interest and Taxes / Sales
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Debt to Total Assets = Total Debt / Total Assets
Going concern value


10. The ____________________________measures the average return on the firm's capital contributions from its owners.
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 equity
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


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


12. What is market value added (MVA)?
Cross-sectional analysis
Current assets - inventory = $50000 - (.5
Debt = $500000 assets - $200000 equity = $300000 $300000 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


13. What does the du pont system of ratio analysis examine?
Trend analysis
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
The Du Pont System of ratio analysis examines the relationships between ratios.
Times Interest Earned = EBIT / Interest Expense


14. Explain trend analysis.

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15. What are debt ratios?

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16. How do you calculate inventory turnover? (This is an Asset Activity 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
Inventory Turnover = Sales / Inventory
Sales
Industry analysis


17. If one-half the current assets in ST-2 consist of inventory - What is the value of the quick ratio?
Debt to equity ratio
Gross Profit Margin = Gross Profit / Sales
Current assets - inventory = $50000 - (.5
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.


18. How do you calculate net profit margin? (This is a Profitability Ratio)
Going concern value
Net Profit Margin = Earnings Available to Common Stockholders / Sales
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Current ratio


19. 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
The Du Pont System of ratio analysis examines the relationships between ratios.
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


20. How do you calculate total asset turnover? (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.
Total Asset Turnover = Sales / Total Assets
Times Interest Earned = EBIT / Interest Expense
Debt


21. How do you calculate the average collection period? (This is an Asset Activity Ratio)
Average Collection Period = Accounts Receivable / Average Daily Credit Sales
Current ratio
Liquidity Ratios measure the ability of a firm to meet its short-term obligations.
Debt to equity ratio


22. 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?
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
Sales
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.


23. How do you calculate the du pont system of ratio analysis?
Cross-sectional analysis
Current liabilities = $200000 total assets - $180000 LTD & CS = $20000 $50000 current assets
Debt = $500000 assets - $200000 equity = $300000 $300000 debt
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover


24. How do you calculate M/B (market to book ratio)? (This is a Market Value Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
M/B = Market Price per Share / Book Value per Share
Return on Equity = Earnings Available to Common Stockholders / Common Equity
X/2044000 = .3390 x(debt) = 692 -916 - Debt/Equity = 692 -916/1351000 = 51%.


25. How do you calculate the modified du pont equation?
Going concern value
Return on Equity = Earnings Available to Common Stockholders / Common Equity
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.


26. The ____________________________measures how much profit out of each sales dollar is left after all expenses are subtracted.
Net profit margin
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.
Average Collection Period = Accounts Receivable / Average Daily Credit Sales


27. What is meant by the leverage effect?
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Net profit margin
Operating Profit Margin = Earnings before Interest and Taxes / Sales
Modified Du Pont Equation: ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier


28. What is a mixed ratio?
Going concern value
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
P/E = Market Price per Share / Earnings per Share
Inventory turnover ratio


29. The ___________________________measures how many days - on average - the company's credit customers take to pay their accounts.
Asset Activity Ratios measure how efficiently a firm uses its assets.
Average collection period
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Gross Profit Margin = Gross Profit / Sales


30. 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
Gross Profit Margin = Gross Profit / Sales
The Du Pont System of ratio analysis examines the relationships between ratios.
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


31. How do you calculate the current ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the 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
Current Ratio = Current Assets / Current Liabilities


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

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

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35. Explain the difference between the current and the quick 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.
Trend analysis
Market to book value ratio
P/E = Market Price per Share / Earnings per Share


36. How do you calculate EVA?

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37. The difference between the firm's future earnings and liquidation value is the _____________________ of the firm.
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
Going concern value
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
Times Interest Earned = EBIT / Interest Expense


38. Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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
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 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
Du Pont Equation: Return on Assets = Net Profit Margin x Total Asset Turnover


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

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40. 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?
P/E = Market Price per Share / Earnings per Share
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
The leverage effect is a result of debt on the balance sheet. By using borrowed funds - the firm can increase its ROE.
Sales


41. How do you calculate return on equity? (This is a Profitability Ratio)
A mixed ratio is a ratio that uses both income statement and balance sheet variables as inputs.
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
Return on Equity = Earnings Available to Common Stockholders / Common Equity
Average collection period


42. Why are M/B and MVA highly correlated?
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.
Industry analysis
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.


43. The ___________________________tells us how efficiently the firm converts inventory to sales.
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.
Inventory turnover ratio
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Total Debt = 0.30 X $20000000 = $6000000 - Debt to Equity ratio = $6000000/$14000000 = 0.43


44. 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.
Average collection period
Inventory Turnover = Sales / Inventory
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%


45. 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.
Industry analysis
Trend analysis
Debt to equity ratio


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%.
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Inventory Turnover = 5000000/3000000 = 1.67
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


47. 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?
Return on equity
M/B = Market Price per Share / Book Value per Share
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.
($100000 current assets - inventory)


48. How do you calculate times interest earned? (This is a Debt 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.
Times Interest Earned = EBIT / Interest Expense
Current assets - inventory = $50000 - (.5
Industry analysis


49. How do you calculate the quick ratio? (This is a Liquidity Ratio)
Quick Ratio = Current Assets Less Inventory / Current Liabilities
Current Ratio = Current Assets / Current Liabilities
Trend analysis
Debt Ratios assess the relative size of a firm's debt load and the firm's ability to pay off the debt.


50. Why do analysts calculate financial ratios?
Inventory Turnover = Sales / 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
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