Financial Statement Analysis
MODULE 10
77.The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose
the method used.
B. may be a problem in ratio analysis even if disclosed.
C. is not a problem in ratio analysis since eventually all methods
will lead to the same end.
D. is only a problem in ratio analysis with respect to inventory.
FINANCIAL STATEMENT ANALYSIS
THEORIES:
6. Management is a user of financial analysis. Which of the following
comments does not represent a fair statement as to the
management perspective?
A. Management is always interested in maximum profitability.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity.
D. Management is interested in the asset structure of the entity.
Industry Analysis
3. Suppose you are comparing two firms in the steel industry. One
firm is large and the other is small. Which type of numbers would
be most meaningful for statement analysis?
A. Absolute numbers would be most meaningful for both the large
and small firm.
B. Absolute numbers would be most meaningful in the large firm;
relative numbers would be most meaningful in the small firm.
C. Relative numbers would be most meaningful for the large firm;
absolute numbers would be most meaningful for the small firm.
D. Relative numbers would be most meaningful for both the large
and small firm, especially for interfirm comparisons.
Limitations
1. A limitation in calculating ratios in financial statement analysis is
that
A. it requires a calculator.
B. no one other than the management would be interested in
them.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company.
4. Which of these statements is false?
A. Many companies will not clearly fit into any one industry.
B. A financial service uses its best judgment as to which industry
the firm best fits.
C. The analysis of an entity's financial statements can be more
meaningful if the results are compared with industry averages
and with results of competitors.
D. A company comparison should not be made with industry
averages if the company does not clearly fit into any one
industry.
2. Which of the following is not a limitation of financial statement
analysis?
A. The cost basis.
C. The diversification of firms.
D. The
availability
of
B. The use of estimates.
information.
5. Which of the following does not represent a problem with financial
analysis?
A. Financial statement analysis is an art; it requires judgment
decisions on the part of the analyst.
B. Financial analysis can be used to detect apparent liquidity
problems.
C. There are as many ratios for financial analysis as there are pairs
of figures.
D. Some industry ratio formulas vary from source to source.
Common-sized financial statements
9. Which of the following generally is the most useful in analyzing
companies of different sizes?
A. comparative statements
C. price-level accounting
B. common-sized financial statements
D.
profitability index
55
Financial Statement Analysis
amount in the subsequent year.
D. There is a negative amount in the base year and a positive
amount in the subsequent year.
12.Statements in which all items are expressed only in relative terms
(percentages of a base) are termed:
A. Vertical statements
C. Funds Statements
B. Horizontal Statements
D. Common-Size Statements
14.Horizontal analysis is a technique for evaluating a series of financial
statement data over a period of time
A. that has been arranged from the highest number to the lowest
number.
B. that has been arranged from the lowest number to the highest
number.
C. to determine which items are in error.
D. to determine the amount and/or percentage increase or
decrease that has taken place.
10.The percent of property, plant and equipment to total assets is an
example of:
A. vertical analysis
C. profitability analysis
B. solvency analysis
D. horizontal analysis
15.Vertical analysis is a technique that expresses each item in a
financial statement
A. in pesos and centavos.
B. as a percent of the item in the previous year.
C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.
Trend analysis
16.Trend analysis allows a firm to compare its performance to:
A. other firms in the industry
C. other industries
B. other time periods within the firm D. none of the above
17.In performing a vertical analysis, the base for prepaid expenses is
A. total current assets.
C. total liabilities.
B. total assets.
D. prepaid
expenses
in
a
previous year.
Risk and return
29.The present and prospective stockholders are primarily concerned
with a firm’
A. profitability
C. leverage
B. liquidity
D. risk and return
Horizontal analysis
8. The percentage analysis of increases and decreases in individual
items in comparative financial statements is called:
A. vertical analysis
C. profitability analysis
D. horizontal analysis
B. solvency analysis
69.Which suppliers of funds bear the greatest risk and should therefore
earn the greatest return?
A. common stockholders
C. preferred shareholders
B. general creditors such as banks D. bondholders
11.Horizontal analysis is also known as
A. linear analysis.
C. trend analysis.
B. vertical analysis.
D. common size analysis.
Measures of Risk
54.The following groups of ratios primarily measure risk:
A. liquidity, activity, and common equity C.
liquidity,
activity,
and debt
B. liquidity, activity, and profitability D. activity,
debt,
and
profitability
13.In which of the following cases may a percentage change be
computed?
A. The trend of the amounts is decreasing but all amounts are
positive.
B. There is no amount in the base year.
C. There is a negative amount in the base year and a negative
Financial ratios
56
Financial Statement Analysis
7. Ratios are used as tools in financial analysis
A. instead of horizontal and vertical analyses.
B. because they can provide information that may not be apparent
from inspection of the individual components of a particular
ratio.
C. because even single ratios by themselves are quite meaningful.
D. because they are prescribed by GAAP.
Measures of liquidity
21.The ratios that are used to determine a company’s short-term debt
paying ability are
A. asset turnover, times interest earned, current ratio, and
receivables turnover.
B. times interest earned, inventory turnover, current ratio, and
receivables turnover.
C. times interest earned, acid-test ratio, current ratio, and
inventory turnover.
D. current ratio, acid-test ratio, receivables turnover, and inventory
turnover.
18.In the near term, the important ratios that provide the information
critical to the short-run operation of the firm are:
A. liquidity, activity, and profitability
C.
liquidity, activity,
and equity
B. liquidity, activity, and debt
D. activity, debt, and profitability
20.Which of the following is a measure of the liquidity position of a
corporation?
A. earnings per share
B. inventory turnover
C. current ratio
D. number of times interest charges earned
75.The ability of a business to pay its debts as they come due and to
earn a reasonable amount of income is referred to as:
A. solvency and leverage
C. solvency and liquidity
B. solvency and profitability
D. solvency and equity
Liquidity ratios
Interested parties
19.The primary concern of short-term creditors when assessing the
strength of a firm is the entity’s
A. short-term liquidity
C. market price of stock
B. profitability
D. leverage
37.Which one of the following ratios would not likely be used by a
short-term creditor in evaluating whether to sell on credit to a
company?
A. Current ratio
C. Asset turnover
B. Acid-test ratio
D. Receivables turnover
35.Short-term creditors are usually most interested in assessing
A. solvency.
C. marketability.
B. liquidity.
D. profitability.
51.Which of the following ratios would be least helpful in appraising
the liquidity of current assets?
A. Accounts Receivable turnover C. Current Ratio
B. Days’ sales in inventory
D. Days’
sales
in
accounts
receivable
36.The two categories of ratios that should be utilized to asses a firm’s
true liquidity are the
A. current and quick ratios
C. liquidity and profitability ratios
B. liquidity and debt ratios
D. liquidity and activity ratios
53.Which ratio is most helpful in appraising the liquidity of current
assets?
A. current ratio
C. acid-test ratio
B. debt ratio
D. accounts receivable turnover
47.Which of the following is the most of interest to a firm’s suppliers?
A. profitability
C. asset utilization
D. liquidity
B. debt
Not a measure of liquidity
57
Financial Statement Analysis
79.Which one of the following ratios would not likely be used by a
short-term creditor in evaluating whether to sell on credit to a
company?
A. accounts receivable turnover. C. acid test ratio.
B. asset turnover.
D. current ratio.
A.
B.
C.
D.
current ratio.
current cash debt coverage ratio.
cash debt coverage ratio.
acid-test ratio.
23.The acid-test or quick ratio
A. is used to quickly determine a company’s solvency and longterm debt paying ability.
B. relates cash, short-term investments, and net receivables to
current liabilities.
C. is calculated by taking one item from the income statement and
one item from the balance sheet.
D. is the same as the current ratio except it is rounded to the
nearest whole percent.
Current ratio
24.Typically, which of the following would be considered to be the
most indicative of a firm's short-term debt paying ability?
A. working capital
C. acid test ratio
B. current ratio
D. days’ sales in receivables
22.The current ratio is
A. calculated by dividing current liabilities by current assets.
B. used to evaluate a company’s liquidity and short-term debt
paying ability.
C. used to evaluate a company’s solvency and long-term debt
paying ability.
D. calculated by subtracting current liabilities from current assets.
Not a liquidity ratio
28.Which one of the following would not be considered a liquidity ratio?
A. Current ratio.
C. Quick ratio.
D. Return on assets.
B. Inventory turnover.
30.Which of the following ratios is rated to be a primary measure of
liquidity and considered of highest significance rating of the
liquidity ratios a bank analyst?
A. Debt/Equity
B. Current ratio
C. Degree of Financial Leverage
D. Accounts Receivable Turnover in Days
Activity ratios
Days receivable & receivable turnover
Quality of receivables
25.Which of the following does not bear on the quality of receivables?
A. shortening the credit terms
B. lengthening the credit terms
C. lengthening the outstanding period
D. all of the above bear on the quality of receivables
41.A weakness of the current ratio is
A. the difficulty of the calculation.
B. that it does not take into account the composition of the
current assets.
C. that it is rarely used by sophisticated analysts.
D. that it can be expressed as a percentage, as a rate, or as a
proportion.
Days receivable
27.A general rule to use in assessing the average collection period is
A. that is should not exceed 30 days.
B. it can be any length as long as the customer continues to buy
merchandise.
C. that it should not greatly exceed the discount period.
D. that it should not greatly exceed the credit term period.
Acid-test or quick ratio
42.A measure of a company’s immediate short-term liquidity is the
Asset utilization ratios
58
Financial Statement Analysis
Performance measures
65.All of the following are asset utilization ratios except:
A. average collection period
C. receivables turnover
B. inventory turnover
D. return on assets
sometimes referred to as:
A. leverage
B. solvency
C. yield
D. quick assets
55.Using financial leverage is a good financial strategy from the
viewpoint of stockholders of companies having:
A. a high debt ratio
C. a steadily declining current
ratio
B. steady or rising profits
D. cyclical highs and lows
Asset turnover
63.Asset turnover measures
A. how often a company replaces its assets.
B. how efficiently a company uses its assets to generate sales.
C. the portion of the assets that have been financed by creditors.
D. the overall rate of return on assets.
46.The ratio that indicates a company’s degree of financial leverage
is the
A. cash debt coverage ratio.
C. free cash flow ratio.
B. debt to total assets.
D. times-interest earned ratio.
66.Total asset turnover measures the ability of a firm to:
A. generate profits on sales
B. generate sales through the use of assets
C. cover long-term debt
D. buy new assets
73.Interest expense creates magnification of earnings through
financial leverage because:
A. while earnings available to pay interest rise, earnings to residual
owners rise faster
B. interest accompanies debt financing
C. interest costs are cheaper than the required rate of return to
equity owners
S. the use of interest causes higher earnings
76.A measure of how efficiently a company uses its assets to generate
sales is the
A. asset turnover ratio.
C. profit margin ratio.
B. cash return on sales ratio.
D. return on assets ratio.
Solvency ratios
Interested parties
50.Long-term creditors are usually most interested in evaluating
A. liquidity.
C. profitability.
D. solvency.
B. marketability.
Measures of solvency
34.The set of ratios that is most useful in evaluating solvency is
A. debt ratio, current ratio, and times interest earned
B. debt ratio, times interest earned, and return on assets
C. debt ratio, times interest earned, and quick ratio
D. debt ratio, times interest earned, and cash flow to debt
Financial Leverage
45.Trading on the equity (leverage) refers to the
A. amount of working capital.
B. amount of capital provided by owners.
C. use of borrowed money to increase the return to owners.
D. earnings per share.
49.Which of the following ratios is most relevant to evaluating
solvency?
A. Return on assets
C. Days’ purchases in accounts
payable
B. Debt ratio
D. Dividend yield
90.The tendency of the rate earned on stockholders' equity to vary
disproportionately from the rate earned on total assets is
Fixed assets to long-term liabilities
59
Financial Statement Analysis
44.Which of the following ratios provides a solvency measure that
shows the margin of safety of noteholders or bondholders and also
gives an indication of the potential ability of the business to borrow
additional funds on a long-term basis?
A. ratio of fixed assets to long-term liabilities
B. ratio of net sales to assets
C. number of days' sales in receivables
D. rate earned on stockholders' equity
Fixed charge coverage
61.A fixed charge coverage:
A. is a balance sheet indication of debt carrying ability
B. is an income statement indication of debt carrying ability
C. frequently includes research and development
D. computation is standard from firm to firm
Off-balance sheet liabilities
62.If a firm has substantial capital or financing leases disclosed in the
notes but not capitalized in the financial statements, then the
A. times interest earned ratio will be overstated, based upon the
financial statements
B. debt ratio will be understated
C. working capital will be understated
D. fixed charge ratio will be overstated, based upon the financial
statements
Debt ratio
59.The debt ratio indicates:
A. a comparison of liabilities with total assets
B. the ability of the firm to pay its current obligations
C. the efficiency of the use of total assets
D. the magnification of earnings caused by leverage
78.The debt to total assets ratio measures
A. the company’s profitability.
B. whether interest can be paid on debt in the current year.
C. the proportion of interest paid relative to dividends paid.
D. the percentage of the total assets provided by creditor.
Profitability ratios
Interested parties
39.The return on assets ratio is affected by the
A. asset turnover ratio.
B. debt to total assets ratio.
C. profit margin ratio.
D. asset turnover and profit margin ratios.
Debt-to-equity ratio
60.Which of the following statements best compares long-term
borrowing capacity ratios?
A. The debt/equity ratio is more conservative than the debt ratio.
B. The debt to tangible net worth ratio is more conservative than
the debt/equity ratio.
C. The debt/equity ratio is more conservative than the debt to
tangible net worth ratio.
D. The debt ratio is more conservative than the debt/equity ratio.
52.Stockholders are most interested in evaluating
A. liquidity.
C. profitability.
B. solvency.
D. marketability.
Performance measures
48.The set of ratios that are most useful in evaluating profitability is
A. ROA, ROE, and debt to equity ratio
C.
ROA, ROE, and
acid-test ratio
B. ROA, ROE, and dividend yield D. ROA, ROE, and cash flow to
debt
Times interest earned
74.A times interest earned ratio of 0.90 to 1 means that
A. the firm will default on its interest payment
B. net income is less than the interest expense
C. the cash flow is less than the net income
D. the cash flow exceeds the net income
Earnings per share
60
Financial Statement Analysis
82.Which of the following ratios appears most frequently in annual
reports?
A. Earnings per Share
C. Profit Margin
B. Return on Equity
D. Debt/Equity
Financial Statement Analysis
Accounts Receivable
26.Which of the following reasons should not be considered in order to
explain why the receivables appear to be abnormally high?
A. Sales volume decreases materially late in the year.
B. Receivables have collectibility problems and possibly some
should have been written off.
C. Material amount of receivables are on the installment basis.
D. Sales volume expanded materially late in the year.
Return on assets
64.Return on assets
A. can be determined by looking at a balance sheet
B. should be smaller than return on sales
C. can be affected by the company’s choice of a depreciation
method
D. should be larger than return on equity
31.An acceleration in the collection of receivables will tend to cause
the accounts receivable turnover to:
A. decrease
C. either increase or decrease
B. remain the same
D. increase
Return on investments
72.Return on investment measures:
A. return to all suppliers of funds C. return
to
all
long-term
suppliers of funds
B. return to all long-term creditors D. return to stockholders
Inventories
32.Which of the following would best indicate that the firm is carrying
excess inventory?
A. a decline in the current ratio
B. stable current ratio with declining quick ratios
C. a decline in days' sales in inventory
D. a rise in total asset turnover
Market test ratios
Price-earnings ratio
56.The price/earnings ratio
A. measures the past earning ability of the firm
B. is a gauge of future earning power as seen by investors
C. relates price to dividends
D. relates
89.When Tri-C Corp. compares its ratios to industry averages, it has a
higher current ratio, an average quick ratio, and a low inventory
turnover. What might you assume about Tri-C?
A. Its cash balance is too low.
C. Its current liabilities are too
low.
B. Its cost of goods sold is too low. D. Its average inventory is
too high.
58.Which of the following ratios usually reflects investors opinions of
the future prospects for the firm?
A. dividend yield
C. book value per share
B. price/earnings ratio
D. earnings per share
Current ratio
33.Which of the following would be most detrimental to a firm's current
ratio if that ratio is currently 2.0?
A. Buy raw materials on credit
B. Sell marketable securities at cost
C. Pay off accounts payable with cash
D. Pay off a portion of long-term debt with cash
Dividend yield
57.Which of the following ratios represents dividends per common
share in relation to market price per common share?
A. dividend payout
C. price/earnings
B. dividend yield
D. book value per share
61
Financial Statement Analysis
Fixed asset turnover ratio
68.Which of the following circumstances will cause sales to fixed
assets to be abnormally high?
A. A labor-intensive industry.
B. The use of units-of-production depreciation.
C. A highly mechanized facility.
D. High direct labor costs from a new union contract.
Sensitivity Analysis
Current ratio
40.A firm has a current ratio of 1:1. In order to improve its liquidity
ratios, this firm should
A. improve its collection practices, thereby increasing cash and
increasing its current and quick ratios.
B. improve its collection practices and pay accounts payable,
there decreasing current liabilities and increasing the current
and quick ratios.
C. decrease current liabilities by utilizing more long-term debt,
thereby increasing the current and quick ratios.
D. increase inventory, thereby increasing current assets and the
current and quick ratios.
Total asset turnover
81.A firm with a total asset turnover lower than the industry standard
and a current ratio which meets industry standard might have
excessive:
A. Accounts receivable
C. Debt
B. Fixed assets
D. Inventory
43.Recently the M&M Company has been having problems. As a result,
its financial situation has deteriorated. M&M approached the First
National Bank for a badly needed loan, but the loan officer insisted
that the current ratio (now 0.5) be improved to at least 0.8 before
the bank would even consider granting the credit. Which of the
following actions would do the most to improve the ratio in the
short run?
A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable.
C. Paying off some long-term debt.
D. Purchasing additional inventory on credit (accounts payable).
Profitability analysis
84.Denver Dynamics has net income of P2,000,000. Oakland
Enterprises has net income of P2,500,000. Which of the following
best compares the profitability of Denver and Oakland?
A. Oakland Enterprises is 25% more profitable than Denver
Dynamics.
B. Oakland Enterprises is more profitable than Denver Dynamics,
but the comparison can't be quantified.
C. Oakland Enterprises is only more profitable if it is smaller than
Denver Dynamics.
D. Further information is needed for a reasonable comparison.
87.Tyner Company had P250,000 of current assets and P90,000 of
current liabilities before borrowing P60,000 from the bank with a
3-month note payable. What effect did the borrowing transaction
have on Tyner Company's current ratio?
A. The ratio remained unchanged.
B. The change in the current ratio cannot be determined.
C. The ratio decreased.
D. The ratio increased.
Debt ratio
86.Companies A and B are in the same industry and have similar
characteristics except that Company A is more leveraged than
Company B. Both companies have the same income before
interest and taxes and the same total assets. Based on this
information we could conclude that
A. Company A has higher net income than Company B
B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B.
D. Company A has a lower debt ratio than company B
88.Which of the following actions will increase a firm's current ratio if it
is now less than 1.0?
62
Financial Statement Analysis
A.
B.
C.
D.
B. Smith Company's times interest earned should be lower than
Jones.
C. Smith has five times better long-term borrowing ability than
Jones.
D. Not enough information to determine if any of the answers are
correct.
Convert marketable securities to cash.
Pay accounts payable with cash.
Buy inventory with short term credit (i.e. accounts payable).
Sell inventory at cost.
Acid-test ratio
38.If a company has an acid-test ratio of 1.2:1, what respective
effects will the borrowing of cash by short-term debt and collection
of accounts receivable have on the ratio?
C.
D.
A.
B.
Short-term
Increase
Increase
Decrease
Decrease
borrowing
Collection
of No effect
Increase
No effect
Decrease
receivable
Times interest earned
85.Which of the following will not cause times interest earned to drop?
Assume no other changes than those listed.
A. A rise in preferred stock dividends.
B. A drop in sales with no change in interest expense.
C. An increase in interest rates.
D. An increase in bonds payable with no change in operating
income.
Profit margin
70.Which of the following would most likely cause a rise in net profit
margin?
A. increased sales
C. decreased operating expenses
B. decreased preferred dividends D. increased cost of sales
DuPont Analysis
71.Which of the following could cause return on assets to decline when
net profit margin is increasing?
of
a
new
A. sale of investments at year-end C. purchase
building at year-end
B. increased turnover of operating assets D.
a stock split
Return on assets
67.Return on assets cannot fall under which of the following
circumstances?
A.
B.
C.
D.
Net
profit
Decline
Rise
Rise
Decline
margin
Total
asset
Rise
Decline
Rise
Decline
turnover
80.A firm with a lower net profit margin can improve its return on total
assets by
A. increasing its debt ratio
C. increasing its total asset
turnover
B. decreasing its fixed assets turnover
D.
decreasing its total
asset turnover
Debt ratio
83.Jones Company has long-term debt of P1,000,000, while Smith
Company, Jones' competitor, has long-term debt of P200,000.
Which of the following statements best represents an analysis of
the long-term debt position of these two firms?
A. Jones obviously has too much debt when compared to its
competitor.
PROBLEMS:
Horizontal analysis
1
. Kline Corporation had net income of P2 million in 2006. Using the
2006 financial elements as the base data, net income decreased by
70 percent in 2007 and increased by 175 percent in 2008. The
respective net income reported by Kline Corporation for 2007 and
2008 are:
63
Financial Statement Analysis
A. P 600,000 and P5,500,000
B. P5,500,000 and P 600,000
2
C. P1,400,000 and P3,500,000
D. P1,400,000 and P5,500,000
Marketable securities
Notes payable, short-term
Prepaid expenses
. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and
net income of P250,000 in 2007. The increase in net income of
P300,000:
C. cannot
be
stated as
a
A. can be stated as 0%
percentage
B. can be stated as 100% increase D. can be stated as 200%
increase
Liquidity ratios
3
. The following financial data have been taken from the records of
Ratio Company:
Accounts receivable
P200,000
Accounts payable
80,000
Bonds payable, due in 10 years
500,000
Cash
100,000
Interest payable, due in three months
25,000
Inventory
440,000
Land
800,000
Notes payable, due in six months
250,000
What will happen to the ratios below if Ratio Company uses cash
to pay 50 percent of its accounts payable?
C.
D.
A.
B.
Current
Increase
Decrease
Increase
Decrease
ratio
Acid-test
Increase
Decrease
Decrease
Increase
ratio
250,000
85,000
15,000
4
. The amount of working capital for the company is:
A. P351,000
C. P211,000
B. P361,000
D. P336,000
5
. The company’s current ratio as of the balance sheet date is:
A. 2.67:1
C. 2.02:1
B. 2.44:1
D. 1.95:1
6
. The company’s acid-test ratio as of the balance sheet date is:
A. 1.80:1
C. 2.02:1
B. 2.40:1
D. 1.76:1
Activity ratios
Receivables turnover
7
. Pine Hardware Store had net credit sales of P6,500,000 and cost of
goods sold of P5,000,000 for the year. The Accounts Receivable
balances at the beginning and end of the year were P600,000 and
P700,000, respectively. The receivables turnover was
A. 7.7 times.
C. 9.3 times.
B. 10.8 times.
D. 10.0 times.
8
Question Nos. 4 through 6 are based on the data taken from the
balance sheet of Nomad Company at the end of the current year:
Accounts payable
P145,000
Accounts receivable
110,000
Accrued liabilities
4,000
Cash
80,000
Income tax payable
10,000
Inventory
140,000
. Milward Corporation’s books disclosed the following information for
the year ended December 31, 2007:
Net credit sales
P1,500,000
Net cash sales
240,000
Accounts receivable at beginning of year
200,000
Accounts receivable at end of year
400,000
Milward’s accounts receivable turnover is
C. 5.00 times
A. 3.75 times
B. 4.35 times
D. 5.80 times
Days receivable
9
. Batik Clothing Store had a balance in the Accounts Receivable
account of P390,000 at the beginning of the year and a balance of
64
Financial Statement Analysis
P410,000 at the end of the year. The net credit sales during the
year amounted to P4,000,000. Using 360-day year, what is the
average collection period of the receivables?
A. 30 days
C. 73 days
B. 65 days
D. 36 days
Inventory, end of 2007
The merchandise inventory turnover for 2007 is:
A. 5.6
C. 7.5
B. 15.6
D. 7.7
14
Cash collection
10
. Deity Company had sales of P30,000, increase in accounts payable
of P5,000, decrease in accounts receivable of P1,000, increase in
inventories of P4,000, and depreciation expense of P4,000. What
was the cash collected from customers?
A. P31,000
C. P34,000
B. P35,000
D. P25,000
Inventory turnover
11
. During 2007, Tarlac Company purchased P960,000 of inventory.
The cost of goods sold for 2007 was P900,000, and the ending
inventory at December 31, 2007 was P180,000. What was the
inventory turnover for 2007?
A. 6.4
C. 5.3
B. 6.0
D. 5.0
12
13
P 376,526
. Based on the following data for the current year, what is the
inventory turnover?
Net sales on account during year
P 500,000
Cost of merchandise sold during year
330,000
Accounts receivable, beginning of year
45,000
Accounts receivable, end of year
35,000
Inventory, beginning of year
90,000
Inventory, end of year
110,000
A. 3.3
C. 3.7
B. 8.3
D. 3.0
Days inventory
15
. Selected information from the accounting records of Eternity
Manufacturing Company follows:
Net sales
P3,600,000
Cost of goods sold
2,400,000
Inventories at January 1
672,000
Inventories at December 31
576,000
What is the number of days’ sales in average inventories for the
year?
A. 102.2
C. 87.6
B. 94.9
D. 68.1
. Selected information from the accounting records of Petals
Company is as follows:
Net sales for 2007
P900,000
Cost of goods sold for 2007
600,000
Inventory at December 31, 2006
180,000
Inventory at December 31, 2007
156,000
Petals’ inventory turnover for 2007 is
A. 5.77 times
C. 3.67 times
B. 3.85 times
D. 3.57 times
Turnover ratios
Asset turnover
Asset
16
. 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?
A. P2,000,000.
C. P2,800,000.
B. P1,200,000.
D. P1,600,000.
. The Moss Company presents the following data for 2007.
Net Sales, 2007
P3,007,124
Net Sales, 2006
P 930,247
Cost of Goods Sold, 2007
P2,000,326
Cost of Goods Sold, 2007
P1,000,120
Inventory, beginning of 2007
P 341,169
Solvency ratios
65
Financial Statement Analysis
Debt ratio
17
. Jordan Manufacturing reports the following capital structure:
Current liabilities
P100,000
Long-term debt
400,000
Deferred income taxes
10,000
Preferred stock
80,000
Common stock
100,000
Premium on common stock
180,000
Retained earnings
170,000
What is the debt ratio?
A. 0.48
C. 0.93
B. 0.49
D. 0.96
Common stock, P50 par (no change during year)
2,000,000
Income before income tax for year
350,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Based on the data presented above, what is the number of times
bond interest charges were earned (round to one decimal point)?
A. 3.7
C. 4.5
B. 4.4
D. 3.5
21
Times interest earned
18
. House of Fashion Company had the following financial statistics for
2006:
Long-term debt (average rate of interest is 8%)
P400,000
Interest expense
35,000
Net income
48,000
Income tax
46,000
Operating income
107,000
What is the times interest earned for 2006?
A. 11.4 times
C. 3.1 times
D. 3.7 times
B. 3.3 times
19
20
. The following data were abstracted from the records of Johnson
Corporation for the year:
Sales
P1,800,000
Bond interest expense
60,000
Income taxes
300,000
Net income
400,000
How many times was bond interest earned?
C. 12.67
A. 7.67
B. 11.67
D. 13.67
Net income
22
. The times interest earned ratio of Mikoto Company is 4.5 times.
The interest expense for the year was P20,000, and the company’s
tax rate is 40%. The company’s net income is:
A. P22,000
C. P54,000
B. P42,000
D. P66,000
. Brava Company reported the following on its income statement:
Income before taxes
P400,000
Income tax expense
100,000
Net income
P300,000
An analysis of the income statement revealed that interest expense
was P100,000. Brava Company’s times interest earned (TIE) was
A. 5 times
C. 3.5 times
B. 4 times
D. 3 times
Profitability Ratios
Return on Common Equity
23
. Selected information for Ivano Company as of December 31 is as
follows:
2006
2007
Preferred stock, 8%, par P100,
P250,000 P250,000
nonconvertible, noncumulative
Common stock
600,000
800,000
Retained earnings
150,000
370,000
Dividends paid on preferred stock for
20,000
20,000
the year
. The balance sheet and income statement data for Candle Factory
indicate the following:
Bonds payable, 10% (issued 1998 due 2022)
P1,000,000
Preferred 5% stock, P100 par (no change during year)300,000
66
Financial Statement Analysis
Net income for the year
120,000
240,000
Ivano’s return on common stockholders’ equity, rounded to the
nearest percentage point, for 2007 is
A. 17%
C. 21%
D. 23%
B. 19%
net income for the year ended December 31 was P50,000. The
yearly preferred dividend was declared.
No capital stock
transactions occurred.
What was the price earnings ratio on
Orchard’s common stock at December 31?
A. 6 to 1
C. 10 to 1
B. 8 to 1
D. 16 to 1
Dividend yield
24
. The following information is available for Duncan Co.:
27
2006
P 1.40
17.50
Dividends per share of common stock
Market price per share of common stock
Which of the following statements is correct?
A. The dividend yield is 8.0%, which is of interest to investors
seeking an increase in market price of their stocks.
B. The dividend yield is 8.0%, which is of special interest to
investors seeking current returns on their investments.
C. The dividend yield is 12.5%, which is of interest to bondholders.
D. The dividend yield is 8.0 times the market price, which is
important in solvency analysis.
Market Test Ratios
Market/Book value ratio
Price per share
25
. What is the market price of a share of stock for a firm with 100,000
shares outstanding, a book value of equity of P3,000,000, and a
market/book ratio of 3.5?
A. P8.57
C. P85.70
B. P30.00
D. P105.00
. On December 31, 2006 and 2007, Renegade Corporation had
100,000 shares of common stock and 50,000 shares of
noncumulative and nonconvertible preferred stock issued and
outstanding.
Additional information:
Stockholders’ equity at 12/31/07
P4,500,000
Net income year ended 12/31/07
1,200,000
Dividends on preferred stock year ended 12/31/07
300,000
Market price per share of common stock at 12/31/07
144
The price-earnings ratio on common stock at December 31, 2007,
was
A. 10 to 1
C. 14 to 1
B. 12 to 1
D. 16 to 1
Payout ratio
28
. Selected financial data of Alexander Corporation for the year ended
December 31, 2007, is presented below:
Operating income
P900,000
Interest expense
(100,000)
Income before income taxes
800,000
Income tax
(320,000)
Net income
480,000
Preferred stock dividend
(200,000)
Net income available to common stockholders
280,000
Common stock dividends were P120,000. The payout ratio is:
A. 42.9 percent
C. 25.0 percent
B. 66.7 percent
D. 71.4 percent
P/E ratio
26
. Orchard Company’s capital stock at December 31 consisted of the
following:
Common stock, P2 par value; 100,000 shares authorized,
issued, and outstanding.
10% noncumulative, nonconvertible preferred stock, P100
par value; 1,000 shares authorized, issued, and outstanding.
Orchard’s common stock, which is listed on a major stock
exchange, was quoted at P4 per share on December 31. Orchard’s
P/E ratio & Payout ratio
Use the following information for question Nos. 33 and 34:
Terry Corporation had net income of P200,000 and paid dividends to
67
Financial Statement Analysis
common stockholders of P40,000 in 2007. The weighted-average
number of shares outstanding in 2007 was 50,000 shares. Terry
Corporation’s common stock is selling for P60 per share in the local
stock exchange.
29
. Terry Corporation’s price-earnings ratio is
A. 3.8 times
C. 18.8 times
B. 15 times
D. 6 times
30
. Terry Corporation’s payout ratio for 2007 is
A. P4 per share
C. 20.0 percent
B. 12.5 percent
D. 25.0 percent
Cost of Sales
600,000
Gross Profit
P 400,000
Operating Expenses
250,000
Operating Income
P 150,000
Interest Expense
30,000
Earnings Before Tax
P 120,000
Income Tax
40,000
Net Income
P 80,000
The degree of financial leverage is:
A. P 150,000 ÷ P 30,000
C. P1,000,000 ÷ P400,000
B. P 150,000 ÷ P120,000
D. P 150,000 ÷ P 80,000
Other Ratios
Book value per share
34
. M Corporation’s stockholders’ equity at December 31, 2007
consists of the following:
6% cumulative preferred stock, P100 par, liquidating value
was P110 per share; issued and outstanding 50,000 shares
P5,000,000
Common stock, par, P5 per share; issued and
outstanding, 400,000 shares
2,000,000
Retained earnings
1,000,000
Total
P8,000,000
Dividends on preferred stock have been paid through 2006.
At December 31, 2007, M Corporation’s book value per share was
A. P5.50
C. P6.75
B. P6.25
D. P7.50
DuPont Model
Debt ratio
31
. The Board of Directors is dissatisfied with last year's ROE of 15%. If
the profit margin and asset turnover remain unchanged at 8% and
1.25 respectively, by how much must the total debt ratio increase
to achieve 20% ROE?
A. Total debt ratio must increase by .5
B. Total debt ratio must increase by 5
C. Total debt ratio must increase by 5%
D. Total debt ratio must increase by 50%
32
. Assume you are given the following relationships for the Orange
Company:
Sales/total assets
1.5X
Return on assets (ROA)
3%
Return on equity (ROE)
5%
The Orange Company’s debt ratio is
A. 40%
C. 35%
B. 60%
D. 65%
35
Leverage Ratio
Degree of financial leverage
33
. A summarized income statement for Leveraged Inc. is presented
below.
Sales
P1,000,000
68
. The following data were gathered from the annual report of Desk
Products.
Market price per share
P30.00
Number of common shares
10,000
Preferred stock, 5% P100 par
P10,000
Common equity
P140,000
The book value per share is:
A. P30.00
C. P14.00
B. P15.00
D. P13.75
Financial Statement Analysis
Mildred’s net sales for the year were
A. P 800,000
C. P 480,000
B. P 672,000
D. P1,200,000
Integrated ratios
Liquidity & activity ratios
Inventory
36
. The current assets of Mayon Enterprise consists of cash, accounts
receivable, and inventory. The following information is available:
Credit sales
75% of total sales
Inventory turnover
5 times
Working capital
P1,120,000
Current ratio
2.00 to 1
Quick ratio
1.25 to 1
Average Collection period
42 days
Working days
360
The estimated inventory amount is:
A. 840,000
C. 720,000
B. 600,000
D. 550,000
37
Gross margin
39
. Selected information from the accounting records of the Blackwood
Co. is as follows:
Net A/R at December 31, 2006
P 900,000
Net A/R at December 31, 2007
P1,000,000
Accounts receivable turnover
5 to 1
Inventories at December 31, 2006
P1,100,000
Inventories at December 31, 2007
P1,200,000
Inventory turnover
4 to 1
What was the gross margin for 2007?
A. P150,000
C. P300,000
B. P200,000
D. P400,000
. The following data were obtained from the records of Salacot
Company:
Current ratio (at year end)
1.5 to 1
Inventory turnover based on sales and ending inventory 15
times
Inventory turnover based on cost of goods sold and ending
inventory
10.5 times
Gross margin for 2007
P360,000
What was Salacot Company’s December 31, 2007 balance in the
Inventory account?
A. P120,000
C. P 80,000
B. P 54,000
D. P 95,000
Market Test Ratio
Dividend yield
40
. Recto Co. has a price earnings ratio of 10, earnings per share of
P2.20, and a pay out ratio of 75%. The dividend yield is
C. 7.5%
A. 25.0%
B. 22.0%
D. 10.0%
41
Net sales
38
. Selected data from Mildred Company’s year-end financial
statements are presented below. The difference between average
and ending inventory is immaterial.
Current ratio
2.0
Quick ratio
1.5
Current liabilities
P120,000
Inventory turnover (based on cost of sales)
8 times
Gross profit margin
40%
69
. The following were reflected from the records of Salvacion
Company:
Earnings before interest and taxes
P1,250,000
Interest expense
250,000
Preferred dividends
200,000
Payout ratio
40 percent
Shares outstanding throughout 2006
Preferred
20,000
Common
25,000
Income tax rate
40 percent
Price earnings ratio
5 times
The dividend yield ratio is
A. 0.50
C. 0.40
D. 0.08
B. 0.12
Financial Statement Analysis
Comprehensive
42
. The balance sheets of Magdangal Company at the end of each of
the first two years of operations indicate the following:
2007
2006
Total current assets
P600,00 P560,00
0
0
Total investments
60,000
40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities
150,000
80,000
Total long-term liabilities
350,000 250,000
Preferred 9% stock, P100 par
100,000 100,000
Common stock, P10 par
600,000 600,000
60,000
60,000
Paid-in capital in excess of parcommon stock
Retained earnings
300,000 210,000
Net income is P115,000 and interest expense is P30,000 for 2007.
What is the rate earned on total assets for 2007 (round percent to
one decimal point)?
A. 9.3 percent
C. 8.9 percent
B. 10.1 percent
D. 7.4 percent
43
. What is the rate earned on stockholders' equity for 2007 (round
percent to one decimal point)?
A. 10.6 percent
C. 12.4 percent
B. 11.2 percent
D. 15.6 percent
44
. What is the earnings per share on common stock for 2007, (round
to two decimal places)?
A. P1.92
C. P1.77
B. P1.89
D. P1.42
45
. If the market price is P30, what is the price-earnings ratio on
common stock for 2007 (round to one decimal point)?
A. 17.0
C. 12.4
B. 12.1
D. 15.9
70
1
.
2
.
3
.
Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
Note: For 2007 & 2008, 2006 was used as a base year.
Answer: C
Answer: C
Current Assets:
Cash
Accounts receivable
Total liquid assets
Inventory
Total current assets
Current Liabilities:
Accounts payable
Notes payable, due in 6 months
Interest payable
Total current liabilities
P100,000
200,000
300,000
440,000
P740,000
P 80,000
250,000
25,000
P355,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00
Acid-test Ratio (300,000 ÷ 355,000)
0.85:1.00
Before any payment, the current ratio is above 1:1 and acid test ratio is below 1:1.
Therefore, the current ratio shall rise but acid test ratio shall go down. If any of these
two ratios is below 1:1, the equal change in current assets and current liabilities
brings direct effect on the ratio, that is, equal increase in current assets and current
liabilities causes the ratio to rise.
4
. Answer: A
Working capital equals the difference between the total current assets and total
current liabilities.
Current Assets:
Cash
P 80,000
Marketable securities
250,000
Accounts receivable
110,000
Total liquid assets
440,000
Inventory
140,000
Prepaid expense
15,000
Total Current Assets
P595,000
Current Liabilities:
Accounts payable
Income tax payable
Notes payable, short-term
Accrued liabilities
P145,000
10,000
85,000
4,000
Working Capital
5
.
Answer: B
Current Ratio: Current Assets ÷ Current Liabilities
(P595,000 ÷ P244,000) = 2.44:1.00
244,000
P351,000
6
.
7
. Answer: D
AR Turnover: Credit sales ÷ Average AR
6,500,000/650,000 = 10.0 times
8
. Answer: C
Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
9
. Answer: D
Average Daily Sales: Annual credit sales ÷ Days’ Year
P4 million ÷ 360 days = P11,111
Answer: A
Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00
Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales
[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
10
.
Answer: A
Sales
Add decrease in Accounts Receivable
Cash collected from sales
P30,000
1,000
P31,000
11
Answer: B
Inventory Turnover: Cost of Goods Sold ÷ Average Inventory
Cost of goods sold
P 900,000
Add Ending inventory
180,000
Total cost available for sales
1,080,000
Deduct cost of purchases
960,000
Beginning inventory
P 120,000
Average Inventory: (P120,000 + P180,000) ÷ 2
P150,000
Inventory Turnover: (P900,000 ÷ P150,000)
6 times
An alternative computation of the inventory turnover is to use Net Sales instead of
Cost of Goods Sold.
12
.
.
Answer: D
Average inventory: (P180,000 + P156,000) ÷ 2
Inventory Turnover: (P600,000 ÷ P168,000)
P168,000
3.57 times
13
.
Answer: A
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times
14
.
Answer: A
Average Inventory: (P90,000 + P110,000) ÷ 2
Inventory Turnover: (P330,000 ÷ P100,000)
P100,000
3.3 times
Answer: B
Average Inventory: (P672,000 + P576,000) ÷2
Inventory Turnover: (P2,400,000 ÷ P624,000)
P624,000
3.846 times
15
.
Inventory Turnover in Days: 365 days ÷ 3.846
94.9 days
Alternative Computation:
Average daily cost of goods sold: = (P2,400,000 ÷ 365)P6,575.34
Turnover in Days: P624,000 ÷ P6,575.34
94.9 days
16
.
Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2P
Average inventory; (P1.1M + P1.2M) ÷ 2
P1,150,000
Net sales: (P950,000 x 5)
Cost of goods sold (P1,150,000 x 4)
Gross margin
17
.
Answer: B
Current liabilities
Long-term debt
Deferred income tax
Total Liabilities
Stockholders’ Equity
Preferred stock
Common stock
Premium on common stock
Retained earnings
Total Assets
950,000
P4,750,000
4,600,000
P 150,000
P 100,000
400,000
10,000
510,000
P 80,000
100,000
180,000
170,000
530,000
P1,040,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
18
.
Answer: D
Times interest earned: Earnings before interest ÷ Interest
Income before tax (P48,000 + P46,000)
P 94,000
Add Interest expense
35,000
Income before Interest expense
P129,000
TIE: P129,000 ÷ P35,000
19
3.7 times
. Answer: A
TIE: Income before interest expense ÷ Interest expense
Income before income tax
P400,000
Add back Interest expense
100,000
Income before interest expense
P500,000
TIE: P500,000 ÷ P100,000
5 times
20
.
Answer: C
Interest Expense: P1M x 0.1
P100,000
Income before interest expense: P350,000 + P100,000 P450,000
Times interest earned: (P450,000 ÷ P100,000)
4.5 times
21
.
Answer: C
Net income
Add: Income taxes
P400,000
P300,000
Interest
Income before interest
60,000
TIE: P760,000 ÷ P60,000
22
.
360,000
P760,000
12.67 times
Answer: B
Earnings before interest expense (P20,000 x 4.5)
Deduct interest expense
Income before income tax
Deduct income tax (P70,000 x 0.4)
Net income
P90,000
20,000
P70,000
28,000
P42,000
23
.
24
. Answer: B
The dividend yield is 8 percent (P1.40 ÷ P17.50)
The dividend yield measures the return of investment in terms of dividends received.
The total expected returns consists of Dividend Yield and the Appreciation in market
price and dividend
25
.
26
27
.
.
Answer: D
Income to Common; (P240,000 – P20,000)
P220,000
Average Common Equity: (P750,000 + P1,170,000) ÷ 2P960,000
Return on Common Equity: (P220 ÷ P960)
23 percent
Answer: D
Market Value of Equity (P3M x 3.5)
Market price per share: (P10.5M ÷ 100,000)
P10,500,000
P105
Answer: B
EPS: P50,000 ÷ 100,000 shares
P/E Ratio: P4.00 ÷ P0.50
P0.50
8 to 1
Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000
P/E Ratio: 144 ÷ 9
P9.00
16
28
. Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common
P120,000 ÷ P280,000 = 42.9%
29
.
30
.
31
.
Answer: B
Price-earnings ratio: Market price ÷ EPS
EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 sharesP4.00
P/E Ratio: P60 ÷ P4
15.0X
Answer: C
Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
Answer: D
ROE: (8% x 1.25)
Last year’s Debt Ratio 1 – (10% ÷ 15%)
10.00%
33.33%
Proposed Debt Ratio 1 – (10% ÷ 20%)
50.00%
Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
32
.
Answer: A
1 – (0.03 ÷ 0.05) = 40%
33
.
Answer: B
Degree of Financial Leverage: Operating Income ÷ Interest Expense
34
.
Answer: A
Total stockholders’ equity
P8,000,000
Deduct:
Liquidation value of Preferred Stock (50,000 s P110)
P5,500,000
Unpaid Preferred Dividends (P5M x 6%)
300,000 5,800,000
Common Equity
P2,200,000
Book Value per Share: P2.2M ÷ 400,000 shares
P5.50
35
. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares
P140,000 ÷ 10,000 shares = P14.00
36
. Answer: A
The inventory amount can be calculated as follows:
Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At
2:1 current ratio, the amount of working capital and current liabilities are both
P1,120,000.
Inventory: Current liabilities x (Current ratio – Acid test ratio)
P1,120,000 x (2.0 – 1.25)
P840,000
A detailed computation can be made as follows:
Current assets: P1,120,000 x 2
Liquid assets: P1,120,000 x 1.25
Inventory
P2,240,000
1,400,000
P 840,000
37
. Answer: C
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers)
360,000/(15 – 10.5) = P80,000
38
.
39
.
Answer: A
Inventory balance (P120,000 x (2.0 – 1.5)
Cost of goods sold 60,000 x 8
Sales (P480,000 ÷ 0.60)
P 60,000
P480,000
P800,000
Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2P
Average inventory; (P1.1M + P1.2M) ÷ 2
P1,150,000
Net sales: (P950,000 x 5)
Cost of goods sold (P1,150,000 x 4)
Gross margin
P4,750,000
4,600,000
P 150,000
950,000
40
41
.
.
Answer: C
Dividend per share: 0.75 x P2.20
Market price: 10 x 2.20
Dividend yield: P1.65 ÷ P22.00 = 7.5%
Answer: D
EBIT
Less interest expense
Earnings before tax
Less Income tax 40%
Net income
Less Preferred dividends
Earnings to Common Stock
Earnings per share 400,000/25,000
Dividend per share: 400,000 x 0.40 ÷ 25,000
Dividend yield 6.4 ÷ (16 x 5)
P1.65
22.00
1,250,000
250,000
1,000,000
400,000
600,000
200,000
400,000
16.00
6.40
8.0%
42
. Answer: B
ROA: Operating income ÷ Average Total Assets
P145,000 ÷ P1,430,000 = 10.1%
43
. Answer: B
Return on stockholders’ equity: Net income ÷ Average stockholders’ equity
P115,000 ÷ P1,027,500 = 11.2%
44
.
Answer: C
Net income
Deduct Preferred Dividends
Income available to common shares
EPS: (P106,000 ÷ 60,000)
45
.
Answer: A
P/E Ratio: P30 ÷ 1.766 = 17.0 times
P115,000
9,000
P106,000
P1.77