Exam 3: Financial Statement Analysis

The lower the fixed-payment coverage ratio, the lower is the firm's 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 return on equity for Dana Dairy Products for 2002 is

The two categories of ratios that should be utilized to assess a firm's true liquidity are the

The two basic measures of liquidity are

The ____________measures the overall effectiveness of management in generating profits with its available assets.

The___________ ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.

The analyst should be careful when evaluating ratios that

The time-series analysis evaluates performance of firms at the same point in time using financial ratios.

The gross margin measures the percentage of each sales dollar left after the firm has paid for its costof goods sold and operating expenses.

The price/earnings (P/E) ratio represents the degree of confidence that investors have in the firm's future performance.

__________ratios are a measure of the speed with which various accounts are converted into sales or cash.

If a firm has annual sales of $1,000,000, a gross profit margin of 20% and an average investment in accounts receivable of $100,000, the firm's receivables turnover is eight times per year.

Typically, higher coverage ratios are preferred, but too high a ratio may indicate under utilization of fixed-payment obligations, which may result in unnecessarily low risk and return.

If an analysis is concerned only with certain specific aspects of a firm's financial position, one or two ratios may provide sufficient information from which to make a reasonable judgement.

__________evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.

_________are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.

To analyze the firm's financial performance, the following types of ratio analyses EXCEPT___________may be used.

Two frequently cited ratios of profitability that can be read directly from the common-size income statement are:

One means to negate the effect of inflation on ratio analysis is to value the fixed assets at

_________analysis involves comparison of current to past performance and the evaluation ofdeveloping trends.