Financial Analysis Introduction Quiz
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Questions and Answers

What does 'paid up capital' refer to in the context of shareholders' equity?

  • Total net income retained by the company
  • The market value of shares issued by a company
  • The amount paid to shareholders in the form of dividends
  • The par value of the stock shares that have been issued (correct)

    • Which of the following is an example of current liabilities?

  • Accounts Payable (correct)
  • Investment securities
  • Long-term debt
  • Bonds payable

    • What components make up the formula for calculating 'working capital requirement' (BFR)?

  • Current assets - Current liabilities
  • Total assets - Current liabilities
  • Inventory + Cash - Short-term debt
  • Inventory + Accounts Receivable - Accounts Payable (correct)

    • What is included in 'other equity accounts'?

    <p>Preferred stock and treasury stock</p> Signup and view all the answers

    How is 'capital employed' in a company defined?

    <p>Non-current assets plus working capital requirement plus cash</p> Signup and view all the answers

    What comprises invested capital?

    <p>Equity and financial debt</p> Signup and view all the answers

    What is the working capital requirement (WRC) calculated as?

    <p>Inventory plus accounts receivable minus accounts payable</p> Signup and view all the answers

    Under what condition is a subsidiary fully consolidated?

    <p>When the parent holds over 50% of the voting rights</p> Signup and view all the answers

    What is true about revenue recognition?

    <p>Revenue is recognized when the effort to generate the sale is substantially complete with a reasonable expectation of payment</p> Signup and view all the answers

    What does the income statement present?

    <p>The revenues and expenses, detailing the profit or loss for the accounting period</p> Signup and view all the answers

    What does the net profit margin measure?

    <p>The profit after tax relative to sales</p> Signup and view all the answers

    Which formula correctly represents Return on Assets (ROA)?

    <p>ROA = $ rac{ ext{Net profit after tax}}{ ext{Total assets}}$</p> Signup and view all the answers

    What is a major limitation of the Return on Equity (ROE)?

    <p>ROE can misrepresent risk since it uses book value not market value</p> Signup and view all the answers

    How is EBITDA margin calculated?

    <p>EBITDA margin = $ rac{ ext{EBITDA}}{ ext{sales}}$</p> Signup and view all the answers

    What does Gross margin represent?

    <p>The profit after deducting only cost of goods sold from sales</p> Signup and view all the answers

    What characterizes operating cash flows in a cash flow statement?

    <p>They should be positive, indicating self-funding business cash flows.</p> Signup and view all the answers

    Which of the following is typically considered an investing cash flow?

    <p>Payments for purchase of PPE</p> Signup and view all the answers

    How should financing cash flows generally be characterized?

    <p>They should be positive, indicating an increase in borrowed funds or capital contributions.</p> Signup and view all the answers

    What is the main purpose of common-size financial statements?

    <p>To facilitate inter-firm financial comparisons despite size differences.</p> Signup and view all the answers

    Which of the following activities does not fall within financing activities?

    <p>Sale of physical assets</p> Signup and view all the answers

    What do profitability ratios generally measure?

    <p>The overall performance as a return on sales or investment.</p> Signup and view all the answers

    Which factor indicates a negative investing cash flow?

    <p>Acquired more assets than disposed, indicating business expansion.</p> Signup and view all the answers

    Which of the following is a primary reason for lenders to engage in financial analysis?

    <p>To ensure timely reimbursement</p> Signup and view all the answers

    What is the formula to calculate net increase or decrease in cash?

    <p>Cash at the end of the period minus cash at the beginning of the period.</p> Signup and view all the answers

    What does the cash flows statement primarily indicate?

    <p>The cash movements over a specific period</p> Signup and view all the answers

    Which of the following is NOT a component of the balance sheet?

    <p>Revenue</p> Signup and view all the answers

    What is the formula to calculate the net book value of Property, Plant, and Equipment (PP&E)?

    <p>Original cost - accumulated depreciation</p> Signup and view all the answers

    Which type of assets are expected to be converted into cash within one year?

    <p>Current assets</p> Signup and view all the answers

    Which of the following is considered an example of intangible assets?

    <p>Goodwill</p> Signup and view all the answers

    Which aspect of financial performance focuses on how effectively the company generates profit from its resources?

    <p>Profitability</p> Signup and view all the answers

    What type of inventories do retail companies typically hold?

    <p>Finished goods</p> Signup and view all the answers

    What does the Earnings per Share (EPS) metric primarily provide to share investors?

    <p>A common denominator to gauge investment returns</p> Signup and view all the answers

    What relationship does the Dividend Payout Ratio express?

    <p>Dividend per share to earnings per share</p> Signup and view all the answers

    How is Total Return calculated?

    <p>Dividend yield plus capital appreciation</p> Signup and view all the answers

    What does the Price Earnings Ratio (P/E Ratio) indicate about a firm's stock?

    <p>The multiple at which the stock is valued based on earnings</p> Signup and view all the answers

    In the Zero-Growth Model, what is assumed about dividends?

    <p>They will remain constant over time</p> Signup and view all the answers

    What is the assumption regarding growth rates (g) in the Constant Growth Model?

    <p>g must be less than k</p> Signup and view all the answers

    How are forecasts of cash flows available to equity investors used in company valuation?

    <p>To compute the value of a company's equity</p> Signup and view all the answers

    Which statement accurately reflects the Dividend Yield?

    <p>It relates dividends per share to the market price of stock</p> Signup and view all the answers

    Study Notes

    Financial Analysis Introduction

    • Resources providers want reimbursement or company growth.
    • Recipients of goods or services need internal management to improve decisions making capacity, benefiting shareholders and improving shareholder value.
    • Regulators (e.g., tax offices) regulate companies via corporate regulators.

    Financial Health Analysis

    • Evaluating a company's financial past, present, and future is important for decision-making.
    • Annual reports (Balance Sheet, Income Statement, Cash Flows Statement) contain crucial financial information.
    • Investors and financial analysts assess a company's profitability, efficiency, liquidity, capital structure, and market performance.

    Balance Sheet

    • Balance sheets are prepared on a specific date, marking the end of an accounting period.
    • The European balance sheet format displays assets and liabilities into 'non-current' (long term) and 'current' (short-term) segments.
    • Examples of assets include Property, Plant, and Equipment (PP&E).

    Current Assets

    • Current assets are converted to cash within a year.
    • Examples include account receivables, inventories (raw materials, work in process, finished goods), prepaid expenses, and cash.

    Equity

    • Equity represents the ownership portion of a company's capital.
    • It includes paid-up capital (ordinary shares), additional paid-in capital, and retained earnings.

    Non-current liabilities

    • These are debts due after one year or operating cycle.
    • Includes long-term debt (bonds, bank loans, mortgages).

    Current liabilities

    • These debts must be paid within one year or an operating cycle.
    • Examples include accounts payables, notes payable, short-term debt, accrued expenses, unearned revenue, and tax liabilities.

    Capital Employed

    • Capital employed refers to how much capital is used and financed within a company's activities.
    • Working capital requirement (WCR) = Inventory + Accounts receivable (AR) – Account payable (AP).
    • Invested Capital = Equity + Financial Debt

    Consolidation

    • Companies combine their financial statements for a better overall picture (e.g., consolidated business operations).
    • Full Consolidation happens when a parent company owns more than 50% of the voting rights.
    • Minority interests appear in the balance sheets and income statements when consolidation takes place.

    Income Statement

    • The income statement measures financial performance over a given period (like a year).
    • It details revenues and expenses to arrive at net income/profit or loss.
    • This is calculated in two steps: revenue identification and cost matching.

    Cash Flow Statement

    • The cash flow statement records cash inflows and outflows over a certain period.
    • It is essential for understanding the company's ability to generate cash from its operations and investments.
    • It is divided into three main categories: operating activities, investing activities, and financing activities.

    Financial Ratio Analysis

    • Ratios analyze a company's financial health by comparing key figures on the statement.
    • Profitability ratios (e.g., gross margin, net profit margin, return on assets) assess overall performance.
    • Liquidity ratios (e.g., current ratio, quick ratio, cash ratio) measure the ability to meet short-term obligations.
    • Leverage ratios (e.g., equity ratio, debt to equity ratio) evaluate the firm's financial structure.
    • Market performance ratios (e.g., EPS, dividend yield per share) represent the firm's stock performance within the market.

    Company Valuation

    • Valuation techniques, like discounted cash flows, evaluate a company's worth.
    • The zero-growth model and the constant-growth model are two key valuation methods.

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    Financial Analysis PDF

    Description

    Test your knowledge on financial analysis concepts, including the importance of evaluating a company's financial health and understanding balance sheets. This quiz covers key financial statements and their roles in decision-making for stakeholders and regulators. Assess your grasp of financial terminology and principles vital for effective management and investment.

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