AE 191 M-TEST 2

1. In terms of income tax reporting, Juan, a partner in a business partnership

a. Shall not be liable for any type of income tax
b. Shall report in his personal income tax return his share in net income
c. Shall report in his personal income tax return the dividend received
d. Shall be liable for final tax for his share in net income after tax of the partnership
2. It is concerned with the company’s financial condition at a point in time. What is it?
a. Balance sheet
b. Income statement
c. Retained earnings statement
d. Statement of cash flows
3. This type of expense is termed as expenses in the main operation of a business:
a. Operating expenses
b. Non-administration expense
c. Selling expenses
d. Administration expense
4. S1: A business analyst may use unaudited financial statements for his own purpose.
S2: A financial statement audit adds credibility to the financial reports like balance sheet and income statement.
a. True; False
b. True; True
c. False; False
d. False; True
5. S1: The financial statement that can provide information about the different sources of financing is the income
statement.
S2: Liquidity refers to the ability of the company to meet currently maturing obligations.
a. True; False
b. True; True
c. False; False
d. False; True
6. A debt-equity ratio is
a. Lower than the debt ratio
b. Higher than the debt ratio
c. About the same as the debt ratio
d. Not correlated with the debt ratio
7. The market value of the share’s selling price is usually significantly different from the book value per share of a
corporation. Which one of the following statements about book value per common share is correct?
a. Market price per common share usually approximates book value per common share
b. Book value per common can be misleading because it is based on current cost
c. A market price per common share that is greater than book value per common share is an indication of an
overvalued stock
d. None of the above is correct
8. Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit.
A company's ROI increases if
a. Sales increase by the same peso amount as expenses and total assets
b. Sales remain the same and expenses are reduced by the same peso amount that total assets increase
c. Sales decrease by the same dollar amount that expenses increase
d. Net profit margin on sales increases by the same percentage as total assets
9. Which of the following statements is correct?
a. Liquidity refers to the firm's ability to pay all its obligations and to continue operations.
b. Solvency refers to a firm's ability to survive in the long-term by paying its short-term obligations.
c. Trading on the equity refers to a firm's sale of its own stocks in the stock exchange.
d. Ratio analysis addresses such issues as the firm's liquidity, use of leverage, management of assets, cost
control, growth, and valuation.
10. Solvency is a firm's ability to survive in the long-term by paying its long-term obligations. Its key ingredients are
capital structure and earning power. Capital structure consists of
a. the capital stocks of the firm.
b. the firm's total assets.
c. the firm's sources of financing, whether long-term or short term, of its assets.
d. the stockholders' equity accounts.
11. Financial statements analysis is not without problems and limitations. Among such limitations is as follows,
except:
a. A ratio that is acceptable to one company may not be acceptable to another when some other factors are
considered.
b. There may be some differences in the accounting methods and estimates used by companies so that
comparison of their ratios may not be advisable.
c. Financial statements are based on current market value of the firm's assets, therefore they do not
reflect historical costs.
 d. The timing of transactions and use of averages in applying the various techniques in financial statements
analysis affect the results to be obtained.
12. Through financial statements analysis, interested parties - such as managers, investors, and creditors can identify
the company's financial strengths and weaknesses and know about the following, except
a. profitability of the business firm.
b. the firm's ability to meet its obligations.
c. safety of the investment in the business.
d. composition of management running the firm.
13. Which of the following statements is not correct? A limitation of ratio analysis affecting comparability from one
interim period to the next within a firm is that
a. in a seasonal business, inventory and receivables may vary widely with year-end balances not reflecting the
averages for the period.
b. management has less incentive to window dress financial statements to improve results.
c. comparability is impaired if different firms use different accounting policies.
d. misleading conclusions may result if improper comparisons are selected.
14. An inflow of cash would result from which of the following?
a. The increase in an asset account other than cash.
b. The decrease in an asset account other than cash.
c. The decrease in an equity account.
d. The decrease in a liability account.
15. How would acquisition of marketable securities be classified?
a. Operating activities.
b. Financing activities.
c. Investing activities.
d. None of the above.
16. GHI Company has ₱900,000 retained earnings on March 31,2021. The company paid common dividends of
₱120,000, and had retained earnings of ₱850,000 on April 1, 2020. How much did GHI Company earn during the
fiscal year?
a. ₱150,000 c. ₱170,000
b. (₱70,000) d. ₱90,000

Solution: (P850,000 RE beg. + NI – P120,000 = P900,000; workback to get NI)

17. OG Corporation started the year with total assets of ₱800,000 and total liabilities of ₱350,000. During the year,
the business recorded ₱1,200,000 in revenues, ₱945,000 in expenses, and dividends of ₱265,000. Using the given
information, the total owner’s equity at the end of the period would be:
a. ₱405,000 c. ₱660,000
b. ₱440,000 d. ₱705,000

Solution: A = L + E; P800,000 = P350,000 + (P450,000 Equity Beg.)

P450,000 Equity Beg. + (P1,200,000 – P945,000) – P265,000 = P440,000 Equity End.

18. RYU Company compiled the following financial information as of December 31, 2019:
Sales revenue 1,120,000
Common stock 240,000
Buildings 320,000
Expenses 1,000,000
Cash 280,000
Dividends 80,000
Inventory 40,000
Accounts payable 160,000
Accounts receivable 120,000
Retained earnings, 1/1/2019 600,000
RYU Company’s total equity on December 31, 2019 is
a. ₱640,000 c. ₱960,000
b. ₱880,000 d. ₱1,020,000

Solution: Total Equity = Common Stock + Retained Earnings

Total Equity = P240,000 + [P600,000 + (P1,120,000 – P1,000,000) – 80,000]
Total Equity = P240,000 + P640,000
Total Equity = P880,000

19. The assets of S&R Corporation comprise of current assets and net plant and equipment. The firm has total assets
of ₱3,800,000, and net plant and equipment of ₱2,900,000. It has notes payable of ₱220,000, long-term debt of
₱670,000, and total common equity of ₱1,800,000. The firm does have accounts payable and accruals on its
statement of financial position. The firm has preferred stocks that was issued before amounting to ₱100,000, with
8% rate. How much is the total accounts payable and accruals on the balance sheet?
 a. ₱0
b. ₱1,010,000
c. ₱1,110,000
d. ₱1,111,000

Solution: P3,800,000 total assets = AP & Accruals + P220,000 notes + P670,000 common stocks + P100,000 preferred
stocks
AP & Accruals = P1,010,000

20. Last year’s asset turnover of Blue Company was 4.0. This year, the company’s sales increased by 30% and
average total assets decreased by 4%. What is this year’s asset turnover?
a. 4.0
b. 3.9
c. 5.4
d. 6.2

Solution: Net Sales ÷ Average Total Assets; (in this case, you can assume any number that will result 4)
For example: P20,000 sales ÷ P5,000 average total assets = 4 times; (P20,000 x 1.30) ÷ (P5,000 x .96) = P26,000
÷ P4,800 = 5.4

The following data were provided for the current year:

 Purchases of inventory P7,800,000 - OA
 Sale of trading securities 2,500,000 - OA
 Paid interest on bank loan 450,000 - OA
 Paid bank loan 1,000,000 - FA
 Collections from customers 10,000,000 - OA
 Cash from issuance of ordinary shares 1,200,000 - FA
 Owner’s withdrawal 2,000,000 - FA
 Paid income taxes 1,350,000 - OA
 Purchase of trading securities 1,000,000 - OA
 Beginning cash balance 1,500,000

21. What is the net cash used in financing activities?

a. P3,000,000
b. P2,000,000
c. P1,800,000
d. P4,200,000

22. What is the net cash provided by investing activities?

a. 0
b. P1,000,000
c. P1,500,000
d. P2,500,000
23. How much is the ending cash balance?
a. P1,000,000
b. P1,500,000
c. P1,600,000
d. P1,700,000

Following are some data from the financial records of Candy Corporation:
2019 2018
Sales ₱1,100,000 ₱975,000
Common Stock 280,000
Retained Earnings 255,000
Dividend Pay-Out Ratio 45%
After Tax profit 15% of sales
Cash 12% of sales
Accounts Receivable 16% of sales
Inventory 20% of sales
Fixed Assets, Net 50% of sales
Accounts Payable 20% of sales
Accruals 5% of sales

24. How much is the total assets as of the end of 2019?

a. ₱1,100,000
b. ₱1,080,000
c. ₱1,078,000
d. ₱955,500
 Solution: (12% + 16% + 20% + 50% = 98% x P1,100,000 = P1,078,000

25. How much was the company’s long-term debt as of the end of 2019?
a. ₱165,000
b. ₱177,250
c. ₱187,250
d. ₱190,000

Solution:
Cash Accounts Payable P220,000
Accounts Receivable Accruals P55,000
Inventory Long term Debt P177,250
Fixed Assets, Net Common Stock P 280,000
Retained Earnings (255k + 165k – 74,250) P 345, 750 (end balance)
P 1,078,000 P 1,078,000

Selected information for CPA Inc. is as follows:

2016 2015
Preferred Stock* ₱125,000 ₱125,000
Common Stock 400,000 350,000
Retained Earnings 175,000 155,000
Dividends paid on preferred stock for the year ended 10,000 10,000
Net income for the year ended 160,000 120,000
*8%, ₱100 par non-cumulative, non-convertible

26. What is the company’s return on equity for 2016?

a. 23%
b. 25.6%
c. 27.8%
d. 30%

Solution: Earnings available to common stockholders ÷Average Common Stockholders’ Equity

(P160,000 net income less P10,000 pref. dividends) ÷ [(P575,000 +P505,000)/2]
P150,000 ÷ P540,000 = 27.78% or 27.8%

27. Selected information for 2016 for Italy Company is as follows:

Cost of Goods Sold ₱3,600,000
Average Inventory 1,200,000
Net Sales 6,900,000
Average Trade Receivables 880,000
Net Purchases 1,800,000
Average Trade Payables 220,000
Assuming 360 days in a year, what was the average number of days in operating cycle for 2016?

a. 78 days
b. 122 days
c. 166 days
d. 155 days

Solution: [P3,600,000 ÷ P1,200,000] + [P6,900,000 ÷ P880,000] = average number of days in operating cycle
(360 days ÷ 3 times) = 120 days average age of inventory
(360 days ÷ 7.84 times) = 45.91 days average age of receivables
120 days + 45.91 days = 165.91 or 166 days

28. DFTF Corporation projects the following for the year 2021:
Operating Income ₱ 20,000,000
Interest Expense ₱ 4,000,000
Preferred Stock Dividends ₱2,500,000
Common Stock Dividends
Pay-out Ratio 30%
Common Stocks Outstanding 1,500,000
Corporate Tax Rate 25%
What is the expected common stock dividend pr share for DFTF Corporation for 2021?
a. ₱2.70
b. ₱2.025
c. ₱1.90
 d. ₱1.67

Solution:
Operating Income P20,000,000
Less: Interest Expense P4,000,000
Net Income Before Tax P16,000,000
Less: Income Tax (25%) P4,000,000
Net Income After Tax P12,000,000
Less: Preferred Dividends P2,500,000
Net Income Available to Common Stockholders P9,500,000
Multiply: Pay-Out Ratio 30% 30%
For Dividend Distribution to CS P 2,850,000
Divide by number of common stocks outstanding 1,500,000 shs
Common Dividend Per Share P1.90

29. During 2019, HSKT purchased ₱1,400,000 of inventory. The 2019 cost of sales was ₱1,500,000 and the ending
inventory at December 31,2019 was ₱250,000. What was the average age of inventory for 2019?
a. 70 days
b. 73 days
c. 201 days
d. 250 days

Solution:
Beginning Inventory (workback) P350,000**
Add: Purchases P1,400,000
Less: Ending Inventory P250,000
Cost of Sales P1,500,000

Average age of inventory = 365 days / Inventory Turnover

Inventory Turnover = P1,500,000 / (350,000**+250,000/2)
Inventory Turnover = P1,500,000 / P300,000
Inventory Turnover = 5 times

Average age of inventory = 365 days / 5 times = 73 days

30. Net profit margin: 5.5%; asset turnover: 3 times; equity ratio: 40%; determine the return on equity.
a. 40%
b. 41.25%
c. 27.5%
d. 28%

Solution: ROE = Net Profit Margin x Asset Turnover x Financial Leverage**

ROE = 5.5% x 3 x (100%/40%)
ROE = 41.25%

**Financial Leverage Formula = Average Assets / Average SHE

FTW Company’s accountant is preparing the company’s Statement of Cash Flows for 2019. Selected information that
may be helpful in the preparation of the statement of cash flows is as follows:

December 31, 2019 December 31, 2018 Increase (Decrease)

Cash ₱200,200 ₱153,980 46,220
Accounts Receivable ₱320,000 275,000 45,000
Inventories ₱350,120 376,080 (25,960)
Accounts Payable ₱270,000 250,000 20,000
2019 Statement of Financial Performance
Sales ₱740,000
Operating Expenses ₱578,200
Income before tax ₱161,800
Income tax ₱36,540
Net income 125,260
Other information:
a) Included in the operating expenses are:
• loss of ₱20,000 resulting from the sale of a machinery for ₱25,000 cash.
• Depreciation expense of ₱125,000
b) The company purchased equipment for ₱90,000 cash during the year
c) The income tax shown on the income statement was paid in full during the year.
d) During the year, the company declared and paid dividends of ₱160,000.

31. If the direct method is used, how much is net cash provided by operating activities?
a. ₱250,110
b. ₱271,220
c. ₱282,200
d. ₱300,000

Solution: The net cash provided by operating activities is the same regardless of whether the direct or indirect method is
used. In short, even if the question asks you to use the direct method, you can use the indirect method to get the answer.

Net Income after Tax P125,260

Addback: Non-Cash Expenses
Loss from sale of machinery P20,000
Depreciation Expense P125,000 P145,000
Less: Increase in Accounts Receivable P45,000
Add: Decrease in Inventories P25,960
Add: Increase in Accounts Payable P20,000
Net Cash Provided by Operating Activities P271,220

32. How much is the net cash flows from financing activities?
a. (₱160,000)
b. ₱160,000
c. (₱220,000)
d. ₱220,000

Solution:
Net Cash Provided by Operating Activities P271,220
Net Cash Used by Investing Activities (P65,000)
Net Cash Provided by Financing Activities (160,000) **workback
Net Increase in Cash P46,220

33. How much is the net cash flows from investing activities?
a. (₱65,000)
b. ₱65,000
c. (₱120,000)
d. ₱120,000

Solution:
Sale of machinery P25,000
Purchase of Equipment (P90,000)
Net Cash Used by Investing Activities (P65,000)

34. Consider the following data about a company:

Current ratio 3.5 to 1
Acid-test ratio 3.0 to 1
Current liabilities at year-end P150,000
Inventory, beginning of the year P125,000
Inventory turnover 8 times
What is the value of the company's inventory at the end of the year?
a. P75,000
b. P125,000
c. P150,000
d. P525,000

Solution: Current Ratio = Current Assets / Current Liabilities

3.5 = Current Assets / P150,000
Current Assets = P525,000

Quick Ratio = Quick Assets / Current Liabilities

3 = Quick Assets / P150,000
Quick Assets = P450,000

Current Assets less Quick Assets = Inventory

P525,000 less P450,000 = P75,000

35. How much is the company's cost of goods sold during the year?
a. P400,000
b. P600,000
c. P1,600,000
d. P800,000

Solution: Inventory Turnover = Cost of Goods Sold / Average Inventory

8 times = COGS / (P125,000 + P75,000/2)
8 times = COGS / (P100,000)
COGS = P800,000