Exam 4: Financial Analysis - Sizing up Firm Performance

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

The principal reason for preparing common-size statements is

The focus of DuPont Analysis is to provide management information as to how the firm is using its resources to maximize returns on owners' investments.

An increase in ________ will decrease the interest coverage ratio.

Paper Clip Office Supply had $24,000,000 in sales last year.Its total asset turnover was 3.0.Interest expense was $100,000 (5% on its $2,000,000 of debt).The company is financed entirely with debt and common equity.What is Paper Clip's debt ratio?

Ratios are used to standardize financial information.

Which of the following parties would perform an external financial analysis?

Kingsbury Associates has current assets as follows: Cash $3,000 Accounts receivable $4,500 Inventories $8,000 If Kingsbury has a current ratio of 3.2,what is its quick ratio?

Which of the following will help an analyst determine how well a firm is able to meet its debt obligations?

The debt ratio is a measure of a firm's

Baker & Co.has applied for a loan from the Trust Us Bank to invest in several potential opportunities.To evaluate the firm as a potential debtor,the bank would like to compare Baker & Co.to the industry.The following are the financial statements given to Trust Us Bank: Balance Sheet 12/31/13 12/31/14 Cash $305 270 Accounts receivable 275 290 Inventory 600 580 Current assets 1,180 1,140 Plant and equipment 1,700 1,940 Less: acc depr (500)(600) Net plant and equipment 1,200 1,340 Total assets $2,380 $2,480 Liabilities and Owners' Equity Accounts payable $150 $200 Notes payable 125 0 Current liabilities 275 200 Bonds 500 500 Owners' equity Ordinary shares 940 1080 Retained earnings 665 700 Total owners' equity 1,605 1,780 Total liabilities and owners' equity $2,380 $2,480 Income Statement Sales (100% credit)$1,100 $1,330 Cost of goods sold 600 760 Gross profit 500 570 Operating expenses 20 30 Depreciation 160 200 Net operating income 320 340 Interest expense 64 57 Net income before taxes 256 283 Taxes 87 96 Net income $169 $187 a.What are the firm's financial strengths and weaknesses? b.Should the bank make the loan? Why or why not?

Skrit Corporation has a net profit margin of 15% and a total asset turnover of 1.7.What is Skrit's return on total assets?

Billing's Pit Corporation has an accounts receivable turnover ratio of 3.4.What is Billing's Pit Corporation's average collection period?

A firm has a return on equity of 20% and a total asset turnover of 4.Assuming a debt ratio of 50% and sales of $1,000,000,calculate net income.

Kiosk Corp.has current assets of $4.5 million and current liabilities of $3.6 million.The current ratio is 1.25,and the quick ratio is 0.75.How much does Kiosk have invested in inventory (in millions)?

Kannan Carpets,Inc.has asked you to calculate the company's quick ratio for 2001.All you have is a partial balance sheet and some assumptions.Using the information provided,calculate Kannan's quick ratio for 2001. Gross profit margin = 50% Inventory turnover (COGS/Inv)= 5 2001 sales = $3,000 Assets Liabilities & Equity Cash ? Accounts payable $50 AR $40 Accruals ? Inventory ? Long-term debt $400 Net fixed assets $500 Equity 250 Total assets $900 Total liab.& equity ?

There is no such thing as a liquidity ratio being too high.

Which of the following statements is true?

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Which of the following is the best indicator of management's effectiveness at generating profits relative to the firm's assets?