ACC 222
MIDTERM EXAM
1. The ratio of earnings before interest and taxes to total interest expense is a measure of
RISK
2. Epsilon Company has a ratio of 2 to 1. A transaction reduces the current ratio. Compare the working capital
before this transaction (X) and the working capital after this transaction (Y).
CANNOT BE DETERMINED
3. If current assets exceed current liabilities, payments to creditors made on the last day of the month
WILL INCREASE CURRENT RATIO
4. Which of the following would represent quick assets?
CASH + NET RECEIVABLES + MARKETABLE SECURITIES
5. Inventories would be included in the calculation of which of the following?
Acid test ratio : No
Current ratio : Yes
6. The ratio of sales to working capital is a measure of
PROFITABILITY
7. Which of the following is an appropriate computation for return on investments?
Income divided by total assets
8. Which of the following is a ratio that measures short-term liquidity?
CURRENT RATIO
9. In comparing the current ratio of two companies, why is it invalid to assume the company with higher
current ratio is the better company?
A higher current ratio may indicate insufficient use of various assets and liabilities
10. Statement 1. Financial statements although historical in nature are the fundamental sourced documents on
financial analysis.
Statement 2. Analysis of financial statements is directed towards the evaluation of profitability, liquidity,
growth and leverage of the company.
Both statements are correct.
11. Hagan Company has a current ratio of 2 to 1 at the end of 2017. Which of the following events will decrease
its current ratio?
Cash borrowing from a bank through the issuance of 6-month note.
12. Green Company has a quick asset ratio of 1.4 to 1 at the end of year 2017. What will be the probable trend
of the current ratio?
The current ratio will be higher than the quick asset ratio.
13. On December 30, 2017, Wool Company had cash of P 300,000, a current ratio of 1.5 to 1, and an acid test
ratio of .50 to 1. On December 31, 2017, the company used all cash to pay the accounts payable. How did
these cash payments affect the acid test ratio and the current ratio?
Acid-test ratio : Increased
Current ratio : Decreased
14. The basic objective of financial statement analysis is to
Assist users in making decision.
15. Which of the following statements is not correct?
The financial statements are called general-purpose financial statements because different users have
common needs and objectives in analyzing financial statements.
16. Royal Company’s net Accounts Receivable were P 500,000 on December 31, 2020, and P 600,000 on
December 31, 2021. Net cash sales for 2021 were P 200,000. The accounts receivable turnover for 2021
was 5. What were Royal’s net sales for 2021?
2,950,000
17. The management of Batman Company, after being informed that the selling price was 6% lower than 2020,
would like to know other factors that change the gross margin as shown below:
2020
2021
Net sales
420,000
426,384
Cost of sales
243, 600
276,242.40
Gross Margin
176,400
150,141.60
Based on the following data, an analysis of changes in gross margin would show an increase (decrease) in net
sales due to sales price of how much?
(27,216)
18. The management of Batman Company, after being informed that the selling price was 6% lower than 2020,
would like to know other factors that change the gross margin as shown below:
Net sales
Cost of sales
Gross Margin
2020
420,000
243, 600
176,400
2021
426,384
276,242.40
150,141.60
Based on the following data, an analysis of changes in gross margin would show an increase (decrease) in cost
of sales due to cost factor of how much?
13,154,000
19. The management of Batman Company, after being informed that the selling price was 6% lower than 2020,
would like to know other factors that change the gross margin as shown below:
2020
2021
Net sales
420,000
426,384
Cost of sales
243, 600
276,242.40
Gross Margin
176,400
150,141.60
Based on the following data, an analysis of changes in gross margin would show an increase (decrease) in
cost of sales due to volume of
19,488
20. The management of Batman Company, after being informed that the selling price was 6% lower than
2020, would like to know other factors that change the gross margin as shown below:
Net sales
Cost of sales
Gross Margin
2020
420,000
243, 600
176,400
2021
426,384
276,242.40
150,141.60
Based on the following data, an analysis of changes in gross margin would show a percent increase (decrease
in unit cost of how much?
5%, .05
21. John & Co. has a debt ratio of 0.50, a total assets turnover of .025, and a profit margin of 10%. The president
is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished
by (1) increasing the profit margin to 14% and by (2) increasing debt utilization. Total assets turnover will
not change. What new debt ratio, along with the 14% profit margin, is required to double the return on
equity?
.65, 65%
22. Break Company provided the following information:
December 31
Net credit sales
Cost of sales
Trade receivables
Inventory
2021
P 1,241,000
876,000
70,000
192,000
2022
P 64,000
156,000
The number of days to convert inventory to sales using 360-day year would be?
71.57 days, 71.57
23. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. What is the
ending total asset balance?
1,200,000
24. Sales for a three-year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0 million. Using
year 1 as the base year, the respective percentage increase in sales in year 2 and 3 are
115% and 125%, 1.15 and 1.25
25. Assume you are given the following relationships for the Bryan Company:
Sales/total assets 1.5 X
Return on assets (ROA) 3%
Return on equity (ROE) 5%
What is the Bryan Company’s debt ratio?
40%, .40
26. The following data were obtained from the records of Train, Inc.:
Current ratio (at year end)
Inventory turnover based on sales and ending inventory
Inventory turnover based on cost of goods sold and ending inventory
Gross margin for 2020
1.5 to 1
15 times
10.5 times
P315,000
What was Trend, Inc.’s December 31, 2020 balance in the Inventory account?
70,000
27. Gladys expects sales for 2020 to be P2,000,000, resulting in a return on sales of 10%. The dividend payout
rate is 60%. Beginning stockholders’ equity was P850,000 and current liabilities are projected to be P300,000
at the end of 2020.
What are the total equities available if the ratio of long-term debt to stockholders’ equity is 60%?
1,788,000
28. The following were reflected from the records of War Freak Company:
Earnings before interest and taxes
Interest expense
Preferred dividends
Payout ratio
Shares outstanding throughout 20xa
Preferred
Common
Income tax rate
Price earnings ratio
The dividend yield ratio is
What is the dividend ratio?
P1,250,000
250,000
200,000
40 %
20,000
25,000
40%
5 times
.08, 8%
29. During 20XA, Reuel Company purchased P1, 920, 000 of inventory. The cost of goods sold for 20XA was P1,
800, 000 and the ending inventory at December 31, 20XA was P360, 000. What was the inventory turn-over
for 20XA?
6.0 times, 6 times, 6x, 6X
30. Selected data from Maui Company’s year-end financial statements are presented below. The difference
between average and ending inventory is immaterial.
Current ratio
Quick ratio
Current liabilities
Inventory turnover (based on cost of sales)
Gross profit margin
2.0
1.5
P120,000
8 times
40%
What are the net sales for the year?
SEMIFINALS
1. A difference between standard costs used for cost control and budgeted costs?
Can exist because standard costs represent what costs should be whereas budgeted costs represent
expected actual costs.
2. Zero-base budgeting requires managers to
Justify all expenditures, not just increases over last years’ amount.
3. Which of the following is an advantage of the budgeting process?
It communicates to employees the specific goals and objectives that may be used in evaluating their
job performance.
4. A decrease in inventory order costs will
Decrease the economic order quantity.
5. Companies that adopt just-in time purchasing systems often experience
A reduction in the number of suppliers.
6. As a company becomes more conservative with respect to working capital policy, it would tend to have
a(n)
Increase in the ratio of current assets to noncurrent liabilities.
7. Wen Company follows an aggressive financing policy in its working capital management while Manong
Corporation follows a conservative financing policy. Which one of the following statements is correct?
When has a low current ratio while Manong has a high current ratio.
8. The Alabang Company has a daily average collection of checks of P250,000. It takes the company 4 days
to convert the checks to cash. Assume a lockbox system could be employed, which would reduce the
cash conversion period to 3 days. The lockbox system would have a net cost of P25,000 per year, but any
additional funds made available could be invested to net 8 percent per year. Should Alabang adopt the
lockbox system?
No; the firm would lose P5,000 per year if the system were used.
9. It is held that the level of accounts receivable that a firm has or holds reflects both the volume of a firm’s
sales on account and the firm’s credit policies. Which one of the following is not considered as part of a
firm’s “credit policy”?
The extent (in terms of money) to which a firm will go to collect an account.
10. Which of the following items is irrelevant for a company that is attempting to minimize the cost of the
stockout?
Cost of placing the order
11. When a specified level of safety stock is carried for an item in inventory, the average inventory level for
that item
Increases by the amount of the safety stock
12. The two most appropriate factors for budgeting manufacturing overhead expenses would be
Management judgment and production volume
13. Of the following items, the one item that would not be considered in evaluating the adequacy of the
budgeted annual operating income for a company is
Internal rate of return
14. Which of the following is not true about a self-imposed budget?
The views of the persons below middle management on budget matters are not considered by top
management.
15. Which of the following sequences for performance reports can be best used in the management control
process as a communication tool?
Plan approval, feedforward, feedback, corrective action.
16.
P1,125,000
17. Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates growth in
sales of 5 percent per month. The target ending inventory in units of the product is 80 percent of the
next month’s estimated sales. There are 150,000 units in inventory as of the end of September. The
production requirement in units of Batik for the quarter ending December 31 would be
P665,720
18.
P8,500
19.
P157,000
20.
Invest P200,000
21.
P70,000
22.
Carrying costs, P150,000, Set-up costs P25,000
23.
P322,200
24.
P43,000
25.
400 units
26.
300
27.
P3,040,000
28.
P (45,833)
29.
P1,620,000
30.
31.81%
31.
29,000 uniforms
32.
P986,000
33.
.
P520,000
34.
P42,000
35.
P71,400