Analysis of Financial Statements

Question 1

Working Capital

Answer 1

Current Assets - Current Liabilities

Question 2

Average Collection Period

Answer 2

360 days / AR Turnover
OR
Ave. AR / Ave. Daily Sales

Question 3

Ave. Daily Sales

Answer 3

Net Credit Sales / 360 days

Question 4

Current Ratio

Answer 4

Current Assets / Current Liabilities

• measure short-term debt paying ability
• declining ratio = deteriorating financial condition
• increasing ratio = unwise stock piling of inventory or may indicate improving financial situation

Question 5

Quick or Acid Test Ratio

Answer 5

Quick Asset / Current Liabilities
Quick assets = cash, marketable securities, AR, net
*Inventories and prepaid expenses are excluded

• more rigorous test of a company’s ability to meet its short-term debts

Question 6

Accounts Receivable Turnover

Answer 6

Net Sales / Ave. AR Balance

• measures how many times a company’s accounts receivable have been turned into cash during the year

Question 7

Inventory Turnover

Answer 7

COGS / Ave. Inventory Balance

• measures the efficiency of the firm n managing and selling the inventory
• high turnover = sign of efficient inventory management
• low turnover = company is carrying too much inventory

Question 8

Total Asset Turnover

Answer 8

Net Sales/Ave. Total Assets

• measures the efficiency of management to generate sales

Question 9

Finished Goods Inventory Turnover

Answer 9

COGS / Ave. FG Inventory

Question 10

Average Sale Period

Answer 10

360 days / Inventory turnover

Question 11

Debt Ratio

Answer 11

Total Liabilities / Total Assets

• proportion of all assets that are financed with debt
• the higher the proportion, the greater the risk

Question 12

Equity Ratio

Answer 12

Total Equity / Total Assets

• indicates proportion of assets provided by investors/owners

Question 13

Debt to Equity Ratio

Answer 13

Total Liabilities / Total Equity

• shows the debt relative to amounts of resources provided by owners
• measures the riskiness of the firm’s capital structure in terms of relationship between the funds supplied by the creditors and investors

Question 14

Gross Profit Margin

Answer 14

Gross Profit / Net Sales

• measures profit generated after consideration of cost of products sold. it measures the ability of company both to control costs and inventories f manufacturing of products and to pass along price increases through sales to customers

Question 15

Operating Profit Margin

Answer 15

Operating Profit / Net Sales

• measure the overall operating efficiency and incorporates all of the expenses associated with ordinary or normal business activities

Question 16

Net Profit Margin

Answer 16

Net Income / Net Sales

• measures the profitability after considering all revenue and expenses including interests, taxes and non-operating items

Question 17

Return on Assets

Answer 17

Net Income / Ave. Total Assets
OR
Net Profit Margin x Total Asset Turnover

Question 18

Return on Equity

Answer 18

Net Income / Ave. Stockholder’s Equity