Exam 3: Financial Statements and Ratio Analysis

The use of the audited financial statements for ratio analysis may not be preferable because there may be no reason to believe that the data contained in them reflect the firm's true financial condition.

As the financial leverage multiplier increases this may result in

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

Earnings available to common shareholders are defined as net profits

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

Table 3.1 Information (2010 values) 1. Sales totaled $110,000 2. The gross profit margin was 25 percent. 3. Inventory turnover was 3.0. 4. There are 360 days in the year. 5. The average collection period was 65 days. 6. The current ratio was 2.40. 7. The total asset turnover was 1.13. 8. The debt ratio was 53.8 percent. -Inventory for CEE in 2010 was ________. (See Table 3.1)

A firm with a total asset turnover that is lower than industry standard but with a current ratio which meets industry standard must have excessive

On the balance sheet net fixed assets represent

Table 3.2 Dana Dairy Products Key Ratios Income Statement Dana Dairy Products For the Year Ended December 31, 2010 Balance Sheet Dana Dairy Products December 31, 2010 -The inventory turnover for Dana Dairy Products in 2010 was ________. (See Table 3.2)

A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might

The president's letter, as the first component of the stockholders' report, is the primary communication from management to the firm's employees.

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 the inventory turnover is divided into 365, it becomes a measure of

As a firm's cash flows become more predictable,

Retained earnings represent the cumulative total of all earnings retained and reinvested in the firm since its inception.

Total asset turnover commonly measures the liquidity of a firm's total assets.

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

The statement of retained earnings reports all of the following EXCEPT

The average age of inventory can be calculated as inventory divided by 365.

Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis.