Exam 3: Financial Statement Analysis

The primary concern of creditors when assessing the strength of a firm is the firm's

Which of the following ratios is difficult for creditors of a firm to analyze because the data is usually not available in published financial statements?

Benchmarking is a type of cross-sectional analysis in which the firm's ratio values are compared to those of firms in other industries, primarily to identify areas for improvement.

A firm with sales of $1,000,000, net income after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of

__________analysis involves the comparison of different firms' financial ratios at the same point in time.

A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive

__________is a term used to describe the magnification of risk and return introduced through the useof fixed cost financing such as preferred stock and long-term debt.

As a firm's cash flows become more predictable,

A firm with a total asset turnover lower than the industry standard and a current ratio which meetsthe industry standard may have

$\text { Dana Dairy Products Key Ratio }$ Industry Actual Actual Average 2001 2002 Current Ratio 1.3 1.0 Quick Ratio 0.8 0.75 Average collection Period 23 days 30 days Inventory Turnover 21.7 19 Debt Ratio 64.7\% 50\% Times Interest Earned 4.8 5.5 Gross Profit Margin 13.6\% 12.0\% Net Profit Margin 1.0\% 0.5\% Return on total assets 2.9\% 2.0\% Return on Equity 8.2\% 4.0\% Income Statement Dana Dairy Products For the Year Ended December 31, 2002 Sales Revenue \ 100,000 Less: Cost of Goods Sold 87,000 -\@cdots Gross Profits \ 13,000 Less: Operating Expenses 11,000 -\@cdots Operating Profits 2,000 Less: Interest Expense 500 -\@cdots Net Profits Before Taxes \ 1,500 Less: Taxes (40\%) 600 Balance Sheet Dana Dairy Products December 31, 2002 ASSETS Cash \ 1,000 Accounts Receivable 8,900 Inventories 4,350 ---- Total Current Assets \ 14,250 Gross Fixed Assets \ 35,000 Less: Accumulated Depreciation 13,250 Net Fixed Assets 21,750 ---- Total Assets \3 6,000 Liabilities \& Stockholders' Equity Accounts Payable \ 9,000 Accruals 6,675 ---- Total Current Liabilities \ 15,675 Long-term Debts 4,125 ---- Total Liabilities \1 9,800 Common Stock 1,000 Retained Earnings 15,200 ---- Total Stockholders' Equity \1 6,200 ---- Total Liab. \& S.E. \3 6,000 -The return on total assets for Dana Dairy Products for 2002 is

The___________ is a popular approach for evaluating profitability in relation to sales by expressing each item on the income statement as a percent of sales.

In cross-sectional comparison of firms operating in several lines of business, the industry average ratios of any of the firms' product lines may be used to analyze the multiproduct firm's financial performance.

ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would beconsidered poor if its average collection period was

The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they come due.

Ratios provide a______________ measure of a company's performance and condition.

The DuPont system allows the firm to break its return on equity into a profit-on-sales component, an efficiency-of-asset-use component, and a use-of-leverage component.

The financial leverage multiplier is an indicator of a corporation utilizing

The higher the debt ratio, the more financial leverage a firm has and, thus, the greater will be its risk and return.

$\text { Dana Dairy Products Key Ratio }$ Industry Actual Actual Average 2001 2002 Current Ratio 1.3 1.0 Quick Ratio 0.8 0.75 Average collection Period 23 days 30 days Inventory Turnover 21.7 19 Debt Ratio 64.7\% 50\% Times Interest Earned 4.8 5.5 Gross Profit Margin 13.6\% 12.0\% Net Profit Margin 1.0\% 0.5\% Return on total assets 2.9\% 2.0\% Return on Equity 8.2\% 4.0\% Income Statement Dana Dairy Products For the Year Ended December 31, 2002 Sales Revenue \ 100,000 Less: Cost of Goods Sold 87,000 -\@cdots Gross Profits \ 13,000 Less: Operating Expenses 11,000 -\@cdots Operating Profits 2,000 Less: Interest Expense 500 -\@cdots Net Profits Before Taxes \ 1,500 Less: Taxes (40\%) 600 Balance Sheet Dana Dairy Products December 31, 2002 ASSETS Cash \ 1,000 Accounts Receivable 8,900 Inventories 4,350 ---- Total Current Assets \ 14,250 Gross Fixed Assets \ 35,000 Less: Accumulated Depreciation 13,250 Net Fixed Assets 21,750 ---- Total Assets \3 6,000 Liabilities \& Stockholders' Equity Accounts Payable \ 9,000 Accruals 6,675 ---- Total Current Liabilities \ 15,675 Long-term Debts 4,125 ---- Total Liabilities \1 9,800 Common Stock 1,000 Retained Earnings 15,200 ---- Total Stockholders' Equity \1 6,200 ---- Total Liab. \& S.E. \3 6,000 -Since 2001, the liquidity of Dana Dairy Products_________

The current ratio provides a better measure of overall liquidity only when a firm's inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity.