Financial Statement Analysis

1. The long term solvency ratio is indicated by the Debt Equity Ratio
2. The Current Ratio is generally used to assess the liquidity position.
3. If the Debt Service Coverage Ratio of a company 1.5 it means that the post-tax cash earnings of the company is 1.5 times its total obligations.
4. Common Size Analysis: a) It is used for comparing the performance of a company in one year with that of another year b) The industry average is compared with the performance of a company.
5. A fixed charges coverage ratio of 4 signifies pre-tax operating income (profit before tax) is 4 times all fixed financial obligations.
6. Other things remaining the same issue of new shares will improve the current ratio.
7. If a company has realized its debtors and has paid off its creditors to the same extent then the current ratio will remain the same if it was equal to 1 previously.
8. If the accounts receivable turnover ratio is 10 it means: a) The net credit sales for the year are 10 times the average receivables b) Receivables are generated 10 times during the year and c) It takes 36 days to collect credit sales on an average. Average collection period = 360/Accounts Receivable Turnover Ratio = 360/10 = 36.
9. If the realized collection period is more than the terms of trade, it can be said that a) the collection job is poor and b) the quality of debtors is poor
10. Low assets turnover ratio may indicate idle assets
11. A gross margin ratio may not indicate earning power
12. The long term solvency positions are measured by a) coverage ratios and b) earnings ratios
13. Dividend Payout Ratio is Dividend Per Share (DPS)/ Earnings per Share (EPS)
14. Initially Retention Ratio affects the dividend yield
15. While doing Time Series Analysis you found that the return on equity is decreasing. The probable reasons are a) Assets turnover is decreasing and b) The debt assets ratio is decreasing.
16. Problems encountered in financial statement analysis a) Development of benchmarks b) Window dressing c) Price level changes d) Interpretation of results
17. Equity multiplier in the Du Pont Analysis = Profit after Tax/ Net Worth
18. Other things being equal, a decrease in average accounts receivable will increase the company’s return on assets.
19. A common size balance sheet portrays the company’s accounts as a per cent of the company’s total assets.
20. An asset’s liquidity measures its potential for generating a profit.
21. Current Ratio = Current Assets / Current Liabilities
22. If the Current Ratio is less than 1 it can be definitely said that the net working capital is negative.
23. 1 year = 365 days. The expression Average Receivable x 365 / Annual Credit Sales is known as Average Collection Period
24. If the Debt Equity Ratio of a company is 2: 1 then it can be said that for every 3 rupees of total assets there are 2 rupees of debt.