05 Financial Analysis Techniques.pdf

05 Financial Analysis Techniques.pdf - Financial Analysis...

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Financial Analysis Techniques Test ID: 7694069 Question #1 of 92 Question ID: 414437 A) B) C) Question #2 of 92 Question ID: 414388 A) B) C) A company must report separate financial information for any segment of their business which: is more than 20% of a firm's revenues. is located in a country other than the firm's home country. accounts for more than 10% of the firm's assets and has risk and return characteristics distinguishable from the company's other lines of business. Explanation Financial statement items must be reported separately for any segment of a firm's business that is greater than 10% of revenue or assets and has risk and return characteristics that are distinguishable from those of the company's other lines of business. Requirements for reporting of geographic segments have the same size threshold and the segment must operate in a business environment that is different from that of the firm's other segments. Given the following income statement: Net Sales 200 Cost of Goods Sold 55 Gross Profit 145 Operating Expenses 30 Operating Profit (EBIT) 115 Interest 15 Earnings Before Taxes (EBT) 100 Taxes 40 Earnings After Taxes (EAT) 60 What are the interest coverage ratio and the net profit margin? Interest Coverage Ratio Net Profit Margin 7.67 0.30 0.57 0.56 2.63 0.30 Explanation Interest coverage ratio = (EBIT / interest expense) = (115 / 15) = 7.67 Net profit margin = (net income / net sales) = (60 / 200) = 0.30 1 of 45
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Question #3 of 92 Question ID: 414355 A) B) C) Question #4 of 92 Question ID: 414402 A) B) C) Question #5 of 92 Question ID: 414363 A) B) Which of the following reasons is least likely a valid limitation of ratio analysis? Determining the target or comparison value for a ratio is difficult. It is difficult to find comparable industry ratios. Calculation of ratios involves a large degree of subjectivity. Explanation There is not a great deal of subjectivity involved in calculating ratios. The mechanical formulas for the calculations are fairly standard and objective for the activity, liquidity, solvency, and profitability ratios, for instance. On the other hand, determining the target or comparison value for a ratio is difficult as it requires some range of acceptable values and that introduces an element of subjectivity. Conclusions cannot be made from viewing one set of ratios as all ratios must be viewed relative to one another in order to make meaningful conclusions. It can be difficult to find comparable industry ratios, especially when analyzing companies that operate in multiple industries. The following footnote appeared in Crabtree Company's 20X7 annual report: "On December 31, 20X7, Crabtree recognized a restructuring charge of $20 million, of which $5 million was for severance pay for employees who will be terminated in 20X8 and $15 million was for land that became permanently impaired in 20X7." Based only on these changes, Crabtree's net profit margin and fixed asset turnover ratio (using year-end financial statement values) in 20X8 as compared to 20X7 will be: Net profit margin Fixed asset turnover Higher Higher Lower Higher Higher Unchanged Explanation
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