Exam 3: Financial Statement Analysis

If a firm has annual sales of $600,000, a gross profit margin of 40% and an average inventory balance of $60,000, the firm's inventory period is 60 days (two months).

$\text { Dana Dairy Products Key Ratio }$ 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 debt ratio for Dana Dairy Products in 2002 is (See Figure 3.2)

The modified DuPont formula relates the firm's return on total assets (ROA) to the

As a rule, the necessary inputs to an effective financial analysis include, at minimum, the income statement and the statement of cash flow.

$\text { Dana Dairy Products Key Ratio }$ 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 average collection period for Dana Dairy Products in 2002 is

Time-series analysis is the evaluation of the firm's financial performance in comparison to other firms at the same point in time.

A firm with a total asset turnover lower than the industry standard may have

In general, the more debt (other people's money) a firm uses in relation to its assets, the smaller its financial leverage.

$\text { Dana Dairy Products Key Ratio }$ 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 inventory management at Dana Dairy Products__________since 2001.

The less fixed-cost debt, or financial leverage, a firm uses, the greater will be its risk and return.

___________is used by financial managers as a structure for dissecting the firm's financial statementsto assess its financial condition.

An analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement is called

An increase in financial leverage will result in________in the return on equity.

Earnings per share represents the dollar amount earned and distributed to shareholders.

The higher the value of__________ratio, the better able the firm is to fulfill its interest obligations.

Due to inflationary effects, inventory costs and depreciation write-offs can differ from their true values, thereby distorting profits.

Which of the following firms would have the slowest inventory turnover ratio?

A decrease in total asset turnover will result in__________in the return on equity.

The use of differing accounting treatments-especially relative to inventory and depreciation-candistort the results of ratio analysis, regardless of whether cross-sectional or time-series analysis isused.

Present and prospective shareholders and lenders pay close attention to the firm's degree of indebtedness and ability to repay debt. Shareholders are concerned since the claims of creditors must be satisfied prior to the distribution of earnings to them. Lenders are concerned since the more indebted the firm, the higher the probability that the firm will be unable to satisfy the claims of all its creditors.