Mastering Financial Statement Analysis

What is the formula for calculating the current ratio?

• Current Ratio = Current Assets + Current Liabilities

• Current Ratio = Current Assets / Current Liabilities

• Current Ratio = Total Assets / Total Liabilities

• Current Ratio = Current Liabilities / Current Assets

What does a high debt-to-equity ratio indicate about a company?

• It reflects a stable financial environment with low risk.

• It indicates a strong market position due to high equity.

• It indicates higher financial risk due to reliance on debt financing.

• It suggests the company has no debt obligations.

How can trend analysis help in forecasting future performance?

• Trend analysis helps in forecasting future performance by identifying patterns in historical data that indicate potential future outcomes.

• Trend analysis ignores historical data and focuses on current events.

• Trend analysis relies solely on expert opinions for predictions.

• Trend analysis is only useful for short-term forecasting.

What is the purpose of common-size financial statements?

• The purpose of common-size financial statements is to facilitate comparison of financial performance across different companies or time periods by expressing line items as percentages.

• To summarize the cash flow activities of a business over a period of time.

• To calculate the total revenue of a company for a specific year.

• To provide a detailed breakdown of individual line items in financial statements.

How do you calculate the gross profit margin?

• Gross Profit Margin = (Total Revenue - COGS) * 100

• Gross Profit Margin = (COGS / Total Revenue) * 100

• Gross Profit Margin = ((Total Revenue - COGS) / Total Revenue) * 100

• Gross Profit Margin = (Total Revenue + COGS) / Total Revenue

What does a declining return on equity (ROE) suggest?

• It shows increased dividends for shareholders.

• It reflects higher sales growth rates.

• It suggests potential issues with profitability or efficiency in using equity.

• It indicates a strong market position.

How can you use horizontal analysis to assess financial performance?

• Horizontal analysis is used to evaluate only cash flow statements.

• Horizontal analysis focuses solely on current year performance.

• It compares financial ratios without considering time periods.

• Horizontal analysis allows for the assessment of financial performance by comparing line items across multiple periods to identify trends and changes.

How do you calculate the operating margin?

• Operating Margin = (Gross Profit / Operating Expenses) x 100

• Operating Margin = (Net Income / Total Assets) x 100

• Operating Margin = (Operating Income / Revenue) x 100

• Operating Margin = (Revenue - Cost of Goods Sold) / Revenue

What does a common-size income statement express as a percentage?

• Each line item as a percentage of total expenses.

• Each line item as a percentage of total assets.

• Each line item as a percentage of net income.

• Each line item as a percentage of total revenue or sales.

How can trend analysis be applied to revenue growth?

• Trend analysis is used to evaluate employee performance rather than revenue.

• Trend analysis helps identify patterns in historical revenue data to forecast future growth.

• Trend analysis only focuses on current revenue without historical data.

• Trend analysis cannot predict future revenue growth accurately.