Financial Ratio Analysis Assignment1. A(n) ______________ is a mathematical relation between
two quantities. A financial ______________ is a(n)
______________ between one bit of financial information
and another. Ratios can be classified according to the way
they are ______________ and the financial ______________
they are describing. There are as many different financial
ratios as there are possible ______________ of items
appearing on financial ______________.
2. Return-on-______________ ratios compare measures of
______________, such as earnings or net income, with measures of ______________. The return on ______________,
also called the basic earning ______________ ratio, is the
ratio of ______________ earnings to total assets. The return
on ______________ is the ratio of the net ______________
shareholders receive to their ______________ in the stock.
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214 QUESTIONS AND PROBLEMS
3. The method of analyzing ______________ ratios in terms
of ______________ margin and ______________ ratios,
referred to as the ______________ System, is credited to
the E.I. Du Pont Corporation. Du Pont’s management
developed this system of breaking down return ratios into
their ______________ to help managers understand the
“______________” behind the firm’s ______________.
4. ______________ reflects the ability of a firm to meet its
______________-term obligations using those assets that
are most readily converted into ______________. Assets
that may be converted into ______________ in a short
period of time are referred to as ______________ assets;
they are listed in financial statements as ______________
assets. ______________ assets are often referred to as
______________ capital, because they represent the
resources needed for the ______________ operations of the
firm’s long-term capital investments.
5. How much liquidity a firm needs depends on its
______________ cycle. The ______________ cycle is the
duration from the time ______________ is invested in
goods and ______________ to the time that investment
produces ______________. The ______________ the
______________ cycle, the ______________ the amount of
net ______________ capital required.
6. ______________ margin ratios compare components of
______________ with ______________. They give us an
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Financial Ratio Analysis 215
idea of what factors make up a firm’s ______________ and
are usually expressed as a portion of each ______________
of sales. The analyst would focus on ______________
profit (sales less cost of goods sold), a measure of income
that is the direct result of ______________ management.
Comparing ______________ profit with ______________
produces the gross profit margin.
7. ______________ ratios, or turnover ratios, can be used to
evaluate the benefits produced by specific ______________,
such as ______________ or accounts ______________ or to
evaluate the benefits produced by the totality of the firm’s
assets. The ______________ turnover ratio indicates how
quickly a firm has used inventory to generate the
______________ and ______________ sold. The accounts
______________ turnover ratio measures how effectively a
firm uses ______________ extended to customers. The
______________ turnover ratio tells how many times during the year the ______________ of a firm’s total assets is
generated in ______________.
8. Financial ______________ is associated with a firm’s ability to satisfy its ______________ obligations, and is often
measured using the extent to which ______________
financing is used relative to ______________. Financial
______________ ratios are used to assess how much financial ______________ the firm has taken on. There are two
types of financial ______________ ratios: ______________
percentages and ______________ ratios.
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216 QUESTIONS AND PROBLEMS
9. ______________ coverage ratio, also called times
______________ ratio, measures a firm’s ability to handle
financial ______________. This ratio indicates how well
the firm can meet the ______________ payments associated with ______________. The ______________ the interest coverage ratio, the ______________ able the firm is to
pay its ______________ expenses.
10.______________ analysis is a method of analysis in which
the components of a financial ______________ are compared with each other. The first step in ______________
analysis is to break down a financial statement—either the
______________ sheet or the ______________ statement—
into its parts. The next step is to ______________ the proportion that each item represents relative to some
______________. In common-size analysis of the
______________ sheet, the benchmark is total
______________. For the ______________ statement, the
benchmark is ______________.
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Financial Ratio Analysis 217
SHORT ANSWER QUESTIONS
Refer to Chapter 22, pages 721–765 in Financial Management and Analysis.
1. How is financial information presented? How is the information classified?
2. What aspects of operating performance and financial condition do financial ratios evaluate?
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218 QUESTIONS AND PROBLEMS
3. What is the Du Pont System and how is it used?
4. What is the difference between book value and market
value and how does it affect financial ratio analysis?
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Financial Ratio Analysis 219
5. Are there any concerns and/or cautions when using financial ratios
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