lOMoARcPSD|29751065

MAS Bobadilla 10- Financial Statement Analysis

Bachelor in Banking and Finance (Polytechnic University of the Philippines)

Studocu is not sponsored or endorsed by any college or university

Downloaded by meciashe tan (meciashet@gmail.com)
 lOMoARcPSD|29751065

Financial Statement Analysis

MODULE 10 to the same end.

D. is only a problem in ratio analysis with respect to inventory.
FINANCIAL STATEMENT ANALYSIS
Industry Analysis
THEORIES: 3. Suppose you are comparing two firms in the steel industry. One firm is
6. Management is a user of financial analysis. Which of the following large and the other is small. Which type of numbers would be most
comments does not represent a fair statement as to the management meaningful for statement analysis?
perspective? A. Absolute numbers would be most meaningful for both the large and
A. Management is always interested in maximum profitability. small firm.
B. Management is interested in the view of investors. B. Absolute numbers would be most meaningful in the large firm; relative
C. Management is interested in the financial structure of the entity. numbers would be most meaningful in the small firm.
D. Management is interested in the asset structure of the entity. C. Relative numbers would be most meaningful for the large firm;
absolute numbers would be most meaningful for the small firm.
Limitations D. Relative numbers would be most meaningful for both the large and
1. A limitation in calculating ratios in financial statement analysis is that small firm, especially for interfirm comparisons.
A. it requires a calculator.
B. no one other than the management would be interested in them. 4. Which of these statements is false?
C. some account balances may reflect atypical data at year end. A. Many companies will not clearly fit into any one industry.
D. they seldom identify problem areas in a company. B. A financial service uses its best judgment as to which industry the firm
best fits.
2. Which of the following is not a limitation of financial statement analysis? C. The analysis of an entity's financial statements can be more
A. The cost basis. C. The diversification of firms. meaningful if the results are compared with industry averages and with
B. The use of estimates. D. The availability of information. results of competitors.
D. A company comparison should not be made with industry averages if
5. Which of the following does not represent a problem with financial the company does not clearly fit into any one industry.
analysis?
A. Financial statement analysis is an art; it requires judgment decisions on Common-sized financial statements
the part of the analyst. 9. Which of the following generally is the most useful in analyzing companies
B. Financial analysis can be used to detect apparent liquidity problems. of different sizes?
C. There are as many ratios for financial analysis as there are pairs of A. comparative statements C. price-level accounting
figures. B. common-sized financial statements D. profitability index
D. Some industry ratio formulas vary from source to source.
12. Statements in which all items are expressed only in relative terms
77. The use of alternative accounting methods: (percentages of a base) are termed:
A. is not a problem in ratio analysis because the footnotes disclose the A. Vertical statements C. Funds Statements
method used. B. Horizontal Statements D. Common-Size Statements
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 10. The percent of property, plant and equipment to total assets is an example

567

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

of: C. to determine which items are in error.

A. vertical analysis C. profitability analysis D. to determine the amount and/or percentage increase or decrease that
B. solvency analysis D. horizontal analysis has taken place.

15. Vertical analysis is a technique that expresses each item in a financial Trend analysis
statement 16. Trend analysis allows a firm to compare its performance to:
A. in pesos and centavos. A. other firms in the industry C. other industries
B. as a percent of the item in the previous year. B. other time periods within the firm D. none of the above
C. as a percent of a base amount.
D. starting with the highest value down to the lowest value. Risk and return
29. The present and prospective stockholders are primarily concerned with a
17. In performing a vertical analysis, the base for prepaid expenses is firm’
A. total current assets. C. total liabilities. A. profitability C. leverage
B. total assets. D. prepaid expenses in a previous B. liquidity D. risk and return
year.
69. Which suppliers of funds bear the greatest risk and should therefore earn
Horizontal analysis the greatest return?
8. The percentage analysis of increases and decreases in individual items in A. common stockholders C. preferred shareholders
comparative financial statements is called: B. general creditors such as banks D. bondholders
A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis Measures of Risk
54. The following groups of ratios primarily measure risk:
11. Horizontal analysis is also known as A. liquidity, activity, and common equity C. liquidity, activity, and debt
A. linear analysis. C. trend analysis. B. liquidity, activity, and profitability D. activity, debt, and profitability
B. vertical analysis. D. common size analysis.
Financial ratios
13. In which of the following cases may a percentage change be computed? 7. Ratios are used as tools in financial analysis
A. The trend of the amounts is decreasing but all amounts are positive. A. instead of horizontal and vertical analyses.
B. There is no amount in the base year. B. because they can provide information that may not be apparent from
C. There is a negative amount in the base year and a negative amount in inspection of the individual components of a particular ratio.
the subsequent year. C. because even single ratios by themselves are quite meaningful.
D. There is a negative amount in the base year and a positive amount in D. because they are prescribed by GAAP.
the subsequent year.
18. In the near term, the important ratios that provide the information critical
14. Horizontal analysis is a technique for evaluating a series of financial to the short-run operation of the firm are:
statement data over a period of time A. liquidity, activity, and profitability C. liquidity, activity, and equity
A. that has been arranged from the highest number to the lowest number. B. liquidity, activity, and debt D. activity, debt, and profitability
B. that has been arranged from the lowest number to the highest number.

568

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

75. The ability of a business to pay its debts as they come due and to earn a corporation?
reasonable amount of income is referred to as: A. earnings per share
A. solvency and leverage C. solvency and liquidity B. inventory turnover
B. solvency and profitability D. solvency and equity C. current ratio
D. number of times interest charges earned
Liquidity ratios
Interested parties 37. Which one of the following ratios would not likely be used by a short-
19. The primary concern of short-term creditors when assessing the strength term creditor in evaluating whether to sell on credit to a company?
of a firm is the entity’ A. Current ratio C. Asset turnover
A. short-term liquidity C. market price of stock B. Acid-test ratio D. Receivables turnover
B. profitability D. leverage
51. Which of the following ratios would be least helpful in appraising the
35. Short-term creditors are usually most interested in assessing liquidity of current assets?
A. solvency. C. marketability. A. Accounts Receivable turnover C. Current Ratio
B. liquidity. D. profitability. B. Days’ . Days’
receivable
36. The two categories of ratios that should be utilized to asses a firm’
liquidity are the 53. Which ratio is most helpful in appraising the liquidity of current assets?
A. current and quick ratios C. liquidity and profitability ratios A. current ratio C. acid-test ratio
B. liquidity and debt ratios D. liquidity and activity ratios B. debt ratio D. accounts receivable turnover

47. Which of the following is the most of interest to a firm’ ? Not a measure of liquidity
A. profitability C. asset utilization 79. Which one of the following ratios would not likely be used by a short-term
B. debt D. liquidity creditor in evaluating whether to sell on credit to a company?
A. accounts receivable turnover. C. acid test ratio.
Measures of liquidity B. asset turnover. D. current ratio.
21. The ratios that are used to determine a company’ -term debt paying
ability are Current ratio
A. asset turnover, times interest earned, current ratio, and receivables 24. Typically, which of the following would be considered to be the most
turnover. indicative of a firm's short-term debt paying ability?
B. times interest earned, inventory turnover, current ratio, and receivables A. working capital C. acid test ratio
turnover. B. current ratio D. days’
C. times interest earned, acid-test ratio, current ratio, and inventory
turnover. 22. The current ratio is
D. current ratio, acid-test ratio, receivables turnover, and inventory A. calculated by dividing current liabilities by current assets.
turnover. B. used to evaluate a company’ -term debt paying
ability.
20. Which of the following is a measure of the liquidity position of a

569

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

C. used to evaluate a company’ -term debt paying 28. Which one of the following would not be considered a liquidity ratio?
ability. A. Current ratio. C. Quick ratio.
D. calculated by subtracting current liabilities from current assets. B. Inventory turnover. D. Return on assets.

30. Which of the following ratios is rated to be a primary measure of liquidity Activity ratios
and considered of highest significance rating of the liquidity ratios a bank Days receivable & receivable turnover
analyst? Quality of receivables
A. Debt/Equity 25. Which of the following does not bear on the quality of receivables?
B. Current ratio A. shortening the credit terms
C. Degree of Financial Leverage B. lengthening the credit terms
D. Accounts Receivable Turnover in Days 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. Days receivable
B. that it does not take into account the composition of the current 27. A general rule to use in assessing the average collection period is
assets. A. that is should not exceed 30 days.
C. that it is rarely used by sophisticated analysts. B. it can be any length as long as the customer continues to buy
D. that it can be expressed as a percentage, as a rate, or as a proportion. merchandise.
C. that it should not greatly exceed the discount period.
Acid-test or quick ratio D. that it should not greatly exceed the credit term period.
42. A measure of a company’ -term liquidity is the
A. current ratio. Asset utilization ratios
B. current cash debt coverage ratio. Performance measures
C. cash debt coverage ratio. 65. All of the following are asset utilization ratios except:
D. acid-test ratio. A. average collection period C. receivables turnover
B. inventory turnover D. return on assets
23. The acid-test or quick ratio
A. is used to quickly determine a company’ -term debt Asset turnover
paying ability. 63. Asset turnover measures
B. relates cash, short-term investments, and net receivables to current A. how often a company replaces its assets.
liabilities. B. how efficiently a company uses its assets to generate sales.
C. is calculated by taking one item from the income statement and one C. the portion of the assets that have been financed by creditors.
item from the balance sheet. D. the overall rate of return on assets.
D. is the same as the current ratio except it is rounded to the nearest
whole percent. 66. Total asset turnover measures the ability of a firm to:
A. generate profits on sales
Not a liquidity ratio B. generate sales through the use of assets
C. cover long-term debt

570

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

D. buy new assets owners rise faster

B. interest accompanies debt financing
76. A measure of how efficiently a company uses its assets to generate sales C. interest costs are cheaper than the required rate of return to equity
is the owners
A. asset turnover ratio. C. profit margin ratio. S. the use of interest causes higher earnings
B. cash return on sales ratio. D. return on assets ratio.
Measures of solvency
Solvency ratios 34. The set of ratios that is most useful in evaluating solvency is
Interested parties A. debt ratio, current ratio, and times interest earned
50.Long-term creditors are usually most interested in evaluating B. debt ratio, times interest earned, and return on assets
A. liquidity. C. profitability. C. debt ratio, times interest earned, and quick ratio
B. marketability. D. solvency. D. debt ratio, times interest earned, and cash flow to debt

Financial Leverage 49. Which of the following ratios is most relevant to evaluating solvency?
45. Trading on the equity (leverage) refers to the A. Return on assets C. Days’
A. amount of working capital. payable
B. amount of capital provided by owners. B. Debt ratio D. Dividend yield
C. use of borrowed money to increase the return to owners.
D. earnings per share. Fixed assets to long-term liabilities
44. Which of the following ratios provides a solvency measure that shows the
90. The tendency of the rate earned on stockholders' equity to vary margin of safety of noteholders or bondholders and also gives an
disproportionately from the rate earned on total assets is sometimes indication of the potential ability of the business to borrow additional funds
referred to as: on a long-term basis?
A. leverage C. yield A. ratio of fixed assets to long-term liabilities
B. solvency D. quick assets B. ratio of net sales to assets
C. number of days' sales in receivables
55. Using financial leverage is a good financial strategy from the viewpoint of D. rate earned on stockholders' equity
stockholders of companies having:
A. a high debt ratio C. a steadily declining current ratio Debt ratio
B. steady or rising profits D. cyclical highs and lows 59. The debt ratio indicates:
A. a comparison of liabilities with total assets
46. The ratio that indicates a company’ B. the ability of the firm to pay its current obligations
A. cash debt coverage ratio. C. free cash flow ratio. C. the efficiency of the use of total assets
B. debt to total assets. D. times-interest earned ratio. D. the magnification of earnings caused by leverage

73. Interest expense creates magnification of earnings through financial 78. The debt to total assets ratio measures
leverage because: A. the company’ .
A. while earnings available to pay interest rise, earnings to residual B. whether interest can be paid on debt in the current year.

571

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

C. the proportion of interest paid relative to dividends paid. Interested parties

D. the percentage of the total assets provided by creditor. 39. The return on assets ratio is affected by the
A. asset turnover ratio.
Debt-to-equity ratio B. debt to total assets ratio.
60. Which of the following statements best compares long-term borrowing C. profit margin ratio.
capacity ratios? D. asset turnover and profit margin 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 52. Stockholders are most interested in evaluating
debt/equity ratio. A. liquidity. C. profitability.
C. The debt/equity ratio is more conservative than the debt to tangible net B. solvency. D. marketability.
worth ratio.
D. The debt ratio is more conservative than the debt/equity ratio. Performance measures
48. The set of ratios that are most useful in evaluating profitability is
Times interest earned A. ROA, ROE, and debt to equity ratio C. ROA, ROE, and acid-test
74. A times interest earned ratio of 0.90 to 1 means that ratio
A. the firm will default on its interest payment B. ROA, ROE, and dividend yield D. ROA, ROE, and cash flow to debt
B. net income is less than the interest expense
C. the cash flow is less than the net income Earnings per share
D. the cash flow exceeds the net income 82. Which of the following ratios appears most frequently in annual reports?
A. Earnings per Share C. Profit Margin
Fixed charge coverage B. Return on Equity D. Debt/Equity
61. A fixed charge coverage:
A. is a balance sheet indication of debt carrying ability Return on assets
B. is an income statement indication of debt carrying ability 64. Return on assets
C. frequently includes research and development A. can be determined by looking at a balance sheet
D. computation is standard from firm to firm B. should be smaller than return on sales
C. can be affected by the company’
Off-balance sheet liabilities D. should be larger than return on equity
62. If a firm has substantial capital or financing leases disclosed in the notes
but not capitalized in the financial statements, then the Return on investments
A. times interest earned ratio will be overstated, based upon the financial 72. Return on investment measures:
statements A. return to all suppliers of funds C. return to all long-term suppliers
B. debt ratio will be understated of funds
C. working capital will be understated B. return to all long-term creditors D. return to stockholders
D. fixed charge ratio will be overstated, based upon the financial
statements Market test ratios
Price-earnings ratio
Profitability ratios 56. The price/earnings ratio

572

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

A. measures the past earning ability of the firm

B. is a gauge of future earning power as seen by investors 89. When Tri-C Corp. compares its ratios to industry averages, it has a higher
C. relates price to dividends current ratio, an average quick ratio, and a low inventory turnover. What
D. relates might you assume about Tri-C?
A. Its cash balance is too low. C. Its current liabilities are too low.
58. Which of the following ratios usually reflects investors opinions of the B. Its cost of goods sold is too low. D. Its average inventory is too high.
future prospects for the firm?
A. dividend yield C. book value per share Current ratio
B. price/earnings ratio D. earnings per share 33. Which of the following would be most detrimental to a firm's current ratio if
that ratio is currently 2.0?
Dividend yield A. Buy raw materials on credit
57. Which of the following ratios represents dividends per common share in B. Sell marketable securities at cost
relation to market price per common share? C. Pay off accounts payable with cash
A. dividend payout C. price/earnings D. Pay off a portion of long-term debt with cash
B. dividend yield D. book value per share
Fixed asset turnover ratio
Financial Statement Analysis 68. Which of the following circumstances will cause sales to fixed assets to be
Accounts Receivable abnormally high?
26. Which of the following reasons should not be considered in order to A. A labor-intensive industry.
explain why the receivables appear to be abnormally high? B. The use of units-of-production depreciation.
A. Sales volume decreases materially late in the year. C. A highly mechanized facility.
B. Receivables have collectibility problems and possibly some should D. High direct labor costs from a new union contract.
have been written off.
C. Material amount of receivables are on the installment basis. Total asset turnover
D. Sales volume expanded materially late in the year. 81. A firm with a total asset turnover lower than the industry standard and a
current ratio which meets industry standard might have excessive:
31. An acceleration in the collection of receivables will tend to cause the A. Accounts receivable C. Debt
accounts receivable turnover to: B. Fixed assets D. Inventory
A. decrease C. either increase or decrease
B. remain the same D. increase Profitability analysis
84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has
Inventories net income of P2,500,000. Which of the following best compares the
32. Which of the following would best indicate that the firm is carrying excess profitability of Denver and Oakland?
inventory? A. Oakland Enterprises is 25% more profitable than Denver Dynamics.
A. a decline in the current ratio B. Oakland Enterprises is more profitable than Denver Dynamics, but the
B. stable current ratio with declining quick ratios comparison can't be quantified.
C. a decline in days' sales in inventory C. Oakland Enterprises is only more profitable if it is smaller than Denver
D. a rise in total asset turnover Dynamics.

573

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

D. Further information is needed for a reasonable comparison. liabilities before borrowing P60,000 from the bank with a 3-month note
payable. What effect did the borrowing transaction have on Tyner
Debt ratio Company's current ratio?
86. Companies A and B are in the same industry and have similar A. The ratio remained unchanged.
characteristics except that Company A is more leveraged than Company B. The change in the current ratio cannot be determined.
B. Both companies have the same income before interest and taxes and C. The ratio decreased.
the same total assets. Based on this information we could conclude that D. The ratio increased.
A. Company A has higher net income than Company B
B. Company A has a lower return on assets than company B 88. Which of the following actions will increase a firm's current ratio if it is now
C. Company A is more risky than Company B. less than 1.0?
D. Company A has a lower debt ratio than company B A. Convert marketable securities to cash.
B. Pay accounts payable with cash.
Sensitivity Analysis C. Buy inventory with short term credit (i.e. accounts payable).
Current ratio D. Sell inventory at cost.
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this
firm should Acid-test ratio
A. improve its collection practices, thereby increasing cash and 38. If a company has an acid-test ratio of 1.2:1, what respective effects will
increasing its current and quick ratios. the borrowing of cash by short-term debt and collection of accounts
B. improve its collection practices and pay accounts payable, there receivable have on the ratio?
decreasing current liabilities and increasing the current and quick A. B. C. D.
ratios. Short-term Increase Increase Decrease Decrease
C. decrease current liabilities by utilizing more long-term debt, thereby borrowing
increasing the current and quick ratios. Collection of No effect Increase No effect Decrease
D. increase inventory, thereby increasing current assets and the current receivable
and quick ratios.
Profit margin
43. Recently the M&M Company has been having problems. As a result, its 70. Which of the following would most likely cause a rise in net profit margin?
financial situation has deteriorated. M&M approached the First National A. increased sales C. decreased operating expenses
Bank for a badly needed loan, but the loan officer insisted that the current B. decreased preferred dividends D. increased cost of sales
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 Return on assets
most to improve the ratio in the short run? 67. Return on assets cannot fall under which of the following circumstances?
A. Using some cash to pay off some current liabilities. A. B. C. D.
B. Collecting some of the current accounts receivable.
Net profit Decline Rise Rise Decline
C. Paying off some long-term debt.
margin
D. Purchasing additional inventory on credit (accounts payable).
Total asset Rise Decline Rise Decline
turnover
87. Tyner Company had P250,000 of current assets and P90,000 of current

574

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

reported by Kline Corporation for 2007 and 2008 are:

Debt ratio A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000
83. Jones Company has long-term debt of P1,000,000, while Smith Company, B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
Jones' competitor, has long-term debt of P200,000. Which of the
following statements best represents an analysis of the long-term debt ii. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net
position of these two firms? income of P250,000 in 2007. The increase in net income of P300,000:
A. Jones obviously has too much debt when compared to its competitor. A. can be stated as 0% C. cannot be stated as a percentage
B. Smith Company's times interest earned should be lower than Jones. B. can be stated as 100% increase D. can be stated as 200% increase
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. Liquidity ratios
iii. The following financial data have been taken from the records of Ratio
Times interest earned Company:
85. Which of the following will not cause times interest earned to drop? Accounts receivable P200,000
Assume no other changes than those listed. Accounts payable 80,000
A. A rise in preferred stock dividends. Bonds payable, due in 10 years 500,000
B. A drop in sales with no change in interest expense. Cash 100,000
C. An increase in interest rates. Interest payable, due in three months 25,000
D. An increase in bonds payable with no change in operating income. Inventory 440,000
Land 800,000
DuPont Analysis Notes payable, due in six months 250,000
71. Which of the following could cause return on assets to decline when net What will happen to the ratios below if Ratio Company uses cash to pay
profit margin is increasing? 50 percent of its accounts payable?
A. sale of investments at year-end C. purchase of a new building at A. B. C. D.
year-end Current Increase Decrease Increase Decrease
B. increased turnover of operating assets D. a stock split ratio
Acid-test Increase Decrease Decrease Increase
80. A firm with a lower net profit margin can improve its return on total assets ratio
by
A. increasing its debt ratio C. increasing its total asset turnover Question Nos. 4 through 6 are based on the data taken from the balance
B. decreasing its fixed assets turnover D. decreasing its total asset sheet of Nomad Company at the end of the current year:
turnover Accounts payable P145,000
Accounts receivable 110,000
Accrued liabilities 4,000
PROBLEMS: Cash 80,000
Horizontal analysis Income tax payable 10,000
i. Kline Corporation had net income of P2 million in 2006. Using the 2006 Inventory 140,000
financial elements as the base data, net income decreased by 70 percent Marketable securities 250,000
in 2007 and increased by 175 percent in 2008. The respective net income

575

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

Notes payable, short-term 85,000 P4,000,000. Using 360-day year, what is the average collection period of
Prepaid expenses 15,000 the receivables?
A. 30 days C. 73 days
iv. The amount of working capital for the company is: B. 65 days D. 36 days
A. P351,000 C. P211,000
B. P361,000 D. P336,000 Cash collection
x. Deity Company had sales of P30,000, increase in accounts payable of
v. The company’ : P5,000, decrease in accounts receivable of P1,000, increase in
A. 2.67:1 C. 2.02:1 inventories of P4,000, and depreciation expense of P4,000. What was the
B. 2.44:1 D. 1.95:1 cash collected from customers?
A. P31,000 C. P34,000
vi. The company’ -test ratio as of the balance sheet date is: B. P35,000 D. P25,000
A. 1.80:1 C. 2.02:1
B. 2.40:1 D. 1.76:1 Inventory turnover
xi. During 2007, Tarlac Company purchased P960,000 of inventory. The
Activity ratios cost of goods sold for 2007 was P900,000, and the ending inventory at
Receivables turnover December 31, 2007 was P180,000. What was the inventory turnover for
vii. Pine Hardware Store had net credit sales of P6,500,000 and cost of 2007?
goods sold of P5,000,000 for the year. The Accounts Receivable A. 6.4 C. 5.3
balances at the beginning and end of the year were P600,000 and B. 6.0 D. 5.0
P700,000, respectively. The receivables turnover was
A. 7.7 times. C. 9.3 times. xii. Selected information from the accounting records of Petals Company is as
B. 10.8 times. D. 10.0 times. follows:
Net sales for 2007 P900,000
viii. Milward Corporation’ Cost of goods sold for 2007 600,000
year ended December 31, 2007: Inventory at December 31, 2006 180,000
Net credit sales P1,500,000 Inventory at December 31, 2007 156,000
Net cash sales 240,000 Petals’
Accounts receivable at beginning of year 200,000 A. 5.77 times C. 3.67 times
Accounts receivable at end of year 400,000 B. 3.85 times D. 3.57 times
Milward’
A. 3.75 times C. 5.00 times xiii. The Moss Company presents the following data for 2007.
B. 4.35 times D. 5.80 times Net Sales, 2007 P3,007,124
Net Sales, 2006 P 930,247
Days receivable Cost of Goods Sold, 2007 P2,000,326
ix. Batik Clothing Store had a balance in the Accounts Receivable account of Cost of Goods Sold, 2007 P1,000,120
P390,000 at the beginning of the year and a balance of P410,000 at the Inventory, beginning of 2007 P 341,169
end of the year. The net credit sales during the year amounted to Inventory, end of 2007 P 376,526

576

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

The merchandise inventory turnover for 2007 is: Long-term debt 400,000
A. 5.6 C. 7.5 Deferred income taxes 10,000
B. 15.6 D. 7.7 Preferred stock 80,000
Common stock 100,000
xiv. Based on the following data for the current year, what is the inventory Premium on common stock 180,000
turnover? Retained earnings 170,000
Net sales on account during year P 500,000 What is the debt ratio?
Cost of merchandise sold during year 330,000 A. 0.48 C. 0.93
Accounts receivable, beginning of year 45,000 B. 0.49 D. 0.96
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000 Times interest earned
Inventory, end of year 110,000 xviii. House of Fashion Company had the following financial statistics for
A. 3.3 C. 3.7 2006:
B. 8.3 D. 3.0 Long-term debt (average rate of interest is 8%) P400,000
Interest expense 35,000
Days inventory Net income 48,000
xv. Selected information from the accounting records of Eternity Income tax 46,000
Manufacturing Company follows: Operating income 107,000
Net sales P3,600,000 What is the times interest earned for 2006?
Cost of goods sold 2,400,000 A. 11.4 times C. 3.1 times
Inventories at January 1 672,000 B. 3.3 times D. 3.7 times
Inventories at December 31 576,000
What is the number of days’ ? xix. Brava Company reported the following on its income statement:
A. 102.2 C. 87.6 Income before taxes P400,000
B. 94.9 D. 68.1 Income tax expense 100,000
Net income P300,000
Turnover ratios An analysis of the income statement revealed that interest expense was
Asset turnover P100,000. Brava Company’ (TIE) was
Asset A. 5 times C. 3.5 times
xvi.Net sales are P6,000,000, beginning total assets are P2,800,000, and the B. 4 times D. 3 times
asset turnover is 3.0. What is the ending total asset balance?
A. P2,000,000. C. P2,800,000. xx. The balance sheet and income statement data for Candle Factory indicate
B. P1,200,000. D. P1,600,000. the following:
Bonds payable, 10% (issued 1998 due 2022) P1,000,000
Solvency ratios Preferred 5% stock, P100 par (no change during year) 300,000
Debt ratio Common stock, P50 par (no change during year) 2,000,000
xvii. Jordan Manufacturing reports the following capital structure: Income before income tax for year 350,000
Current liabilities P100,000 Income tax for year 80,000

577

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

Common dividends paid 50,000 percentage point, for 2007 is

Preferred dividends paid 15,000 A. 17% C. 21%
Based on the data presented above, what is the number of times bond B. 19% D. 23%
interest charges were earned (round to one decimal point)?
A. 3.7 C. 4.5 Dividend yield
B. 4.4 D. 3.5 xxiv. The following information is available for Duncan Co.:
2006
xxi. The following data were abstracted from the records of Johnson Dividends per share of common stock P 1.40
Corporation for the year: Market price per share of common stock 17.50
Sales P1,800,000 Which of the following statements is correct?
Bond interest expense 60,000 A. The dividend yield is 8.0%, which is of interest to investors seeking an
Income taxes 300,000 increase in market price of their stocks.
Net income 400,000 B. The dividend yield is 8.0%, which is of special interest to investors
How many times was bond interest earned? seeking current returns on their investments.
A. 7.67 C. 12.67 C. The dividend yield is 12.5%, which is of interest to bondholders.
B. 11.67 D. 13.67 D. The dividend yield is 8.0 times the market price, which is important in
solvency analysis.
Net income
xxii. The times interest earned ratio of Mikoto Company is 4.5 times. The Market Test Ratios
interest expense for the year was P20,000, and the company’ Market/Book value ratio
40%. The company’ : Price per share
A. P22,000 C. P54,000 xxv. What is the market price of a share of stock for a firm with 100,000
B. P42,000 D. P66,000 shares outstanding, a book value of equity of P3,000,000, and a
market/book ratio of 3.5?
Profitability Ratios A. P8.57 C. P85.70
Return on Common Equity B. P30.00 D. P105.00
xxiii. Selected information for Ivano Company as of December 31 is as
follows: P/E ratio
2006 2007 xxvi. Orchard Company’
Preferred stock, 8%, par P100, P250,000 P250,000 following:
nonconvertible, noncumulative  Common stock, P2 par value; 100,000 shares authorized, issued, and
Common stock 600,000 800,000 outstanding.
Retained earnings 150,000 370,000  10% noncumulative, nonconvertible preferred stock, P100 par value;
Dividends paid on preferred stock for the 20,000 20,000 1,000 shares authorized, issued, and outstanding.
year Orchard’ , which is listed on a major stock exchange, was
Net income for the year 120,000 240,000 quoted at P4 per share on December 31. Orchard’
Ivano’ , rounded
’ to the nearest year ended December 31 was P50,000. The yearly preferred dividend

578

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

was declared. No capital stock transactions occurred. What was the xxix. Terry Corporation’ -earnings ratio is
price earnings ratio on Orchard’ ? A. 3.8 times C. 18.8 times
A. 6 to 1 C. 10 to 1 B. 15 times D. 6 times
B. 8 to 1 D. 16 to 1
xxx. Terry Corporation’
xxvii. On December 31, 2006 and 2007, Renegade Corporation had 100,000 A. P4 per share C. 20.0 percent
shares of common stock and 50,000 shares of noncumulative and B. 12.5 percent D. 25.0 percent
nonconvertible preferred stock issued and outstanding.
Additional information: DuPont Model
Stockholders’ ,500,000 Debt ratio
Net income year ended 12/31/07 1,200,000 xxxi. The Board of Directors is dissatisfied with last year's ROE of 15%. If the
Dividends on preferred stock year ended 12/31/07 300,000 profit margin and asset turnover remain unchanged at 8% and 1.25
Market price per share of common stock at 12/31/07 144 respectively, by how much must the total debt ratio increase to achieve
The price-earnings ratio on common stock at December 31, 2007, was 20% ROE?
A. 10 to 1 C. 14 to 1 A. Total debt ratio must increase by .5
B. 12 to 1 D. 16 to 1 B. Total debt ratio must increase by 5
C. Total debt ratio must increase by 5%
Payout ratio D. Total debt ratio must increase by 50%
xxviii. Selected financial data of Alexander Corporation for the year ended
December 31, 2007, is presented below: xxxii. Assume you are given the following relationships for the Orange
Operating income P900,000 Company:
Interest expense (100,000) Sales/total assets 1.5X
Income before income taxes 800,000 Return on assets (ROA) 3%
Income tax (320,000) Return on equity (ROE) 5%
Net income 480,000 The Orange Company’
Preferred stock dividend (200,000) A. 40% C. 35%
Net income available to common stockholders 280,000 B. 60% D. 65%
Common stock dividends were P120,000. The payout ratio is:
A. 42.9 percent C. 25.0 percent Leverage Ratio
B. 66.7 percent D. 71.4 percent Degree of financial leverage
xxxiii. A summarized income statement for Leveraged Inc. is presented
P/E ratio & Payout ratio below.
Use the following information for question Nos. 33 and 34: Sales P1,000,000
Terry Corporation had net income of P200,000 and paid dividends to Cost of Sales 600,000
common stockholders of P40,000 in 2007. The weighted-average number Gross Profit P 400,000
of shares outstanding in 2007 was 50,000 shares. Terry Corporation’ Operating Expenses 250,000
common stock is selling for P60 per share in the local stock exchange. Operating Income P 150,000
Interest Expense 30,000

579

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

Earnings Before Tax P 120,000 Credit sales 75% of total sales

Income Tax 40,000 Inventory turnover 5 times
Net Income P 80,000 Working capital P1,120,000
The degree of financial leverage is: Current ratio 2.00 to 1
A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000 Quick ratio 1.25 to 1
B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000 Average Collection period 42 days
Working days 360
Other Ratios The estimated inventory amount is:
Book value per share A. 840,000 C. 720,000
xxxiv. M Corporation’ ’ , 2007 consists B. 600,000 D. 550,000
of the following:
6% cumulative preferred stock, P100 par, liquidating value xxxvii. The following data were obtained from the records of Salacot
was P110 per share; issued and outstanding 50,000 shares Company:
P5,000,000 Current ratio (at year end) 1.5 to 1
Common stock, par, P5 per share; issued and Inventory turnover based on sales and ending inventory 15 times
outstanding, 400,000 shares 2,000,000 Inventory turnover based on cost of goods sold and ending inventory
Retained earnings 1,000,000 10.5 times
Total P8,000,000 Gross margin for 2007 P360,000
Dividends on preferred stock have been paid through 2006. What was Salacot Company’ , 2007 balance in the
At December 31, 2007, M Corporation’ Inventory account?
A. P5.50 C. P6.75 A. P120,000 C. P 80,000
B. P6.25 D. P7.50 B. P 54,000 D. P 95,000

xxxv. The following data were gathered from the annual report of Desk Net sales
Products. xxxviii. Selected data from Mildred Company’ -end financial statements
Market price per share P30.00 are presented below. The difference between average and ending
Number of common shares 10,000 inventory is immaterial.
Preferred stock, 5% P100 par P10,000 Current ratio 2.0
Common equity P140,000 Quick ratio 1.5
The book value per share is: Current liabilities P120,000
A. P30.00 C. P14.00 Inventory turnover (based on cost of sales) 8 times
B. P15.00 D. P13.75 Gross profit margin 40%
Mildred’
Integrated ratios A. P 800,000 C. P 480,000
Liquidity & activity ratios B. P 672,000 D. P1,200,000
Inventory
xxxvi. The current assets of Mayon Enterprise consists of cash, accounts Gross margin
receivable, and inventory. The following information is available:

580

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

xxxix. Selected information from the accounting records of the Blackwood Total current assets P600,00 P560,00
Co. is as follows: 0 0
Net A/R at December 31, 2006 P 900,000 Total investments 60,000 40,000
Net A/R at December 31, 2007 P1,000,000 Total property, plant, and equipment 900,000 700,000
Accounts receivable turnover 5 to 1 Total current liabilities 150,000 80,000
Inventories at December 31, 2006 P1,100,000 Total long-term liabilities 350,000 250,000
Inventories at December 31, 2007 P1,200,000 Preferred 9% stock, P100 par 100,000 100,000
Inventory turnover 4 to 1 Common stock, P10 par 600,000 600,000
What was the gross margin for 2007? Paid-in capital in excess of par-common 60,000 60,000
A. P150,000 C. P300,000 stock
B. P200,000 D. P400,000 Retained earnings 300,000 210,000
Net income is P115,000 and interest expense is P30,000 for 2007.
Market Test Ratio What is the rate earned on total assets for 2007 (round percent to one
Dividend yield decimal point)?
xl. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, A. 9.3 percent C. 8.9 percent
and a pay out ratio of 75%. The dividend yield is B. 10.1 percent D. 7.4 percent
A. 25.0% C. 7.5%
B. 22.0% D. 10.0% xliii. What is the rate earned on stockholders' equity for 2007 (round
percent to one decimal point)?
xli. The following were reflected from the records of Salvacion Company: A. 10.6 percent C. 12.4 percent
Earnings before interest and taxes P1,250,000 B. 11.2 percent D. 15.6 percent
Interest expense 250,000
Preferred dividends 200,000 xliv. What is the earnings per share on common stock for 2007, (round to
Payout ratio 40 percent two decimal places)?
Shares outstanding throughout 2006 A. P1.92 C. P1.77
Preferred 20,000 B. P1.89 D. P1.42
Common 25,000
Income tax rate 40 percent xlv. If the market price is P30, what is the price-earnings ratio on common
Price earnings ratio 5 times stock for 2007 (round to one decimal point)?
The dividend yield ratio is A. 17.0 C. 12.4
A. 0.50 C. 0.40 B. 12.1 D. 15.9
B. 0.12 D. 0.08

Comprehensive i. Answer: A
xlii. The balance sheets of Magdangal Company at the end of each of the first 2007: P2,000,000 (1 – 0.7) = P600,000
two years of operations indicate the following: 2008: P2,000,000 (1 + 1.75) = P5,500,000
2007 2006 Note: For 2007 & 2008, 2006 was used as a base year.

581

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

ii. Answer: C Current Liabilities:

Accounts payable P145,000
iii. Answer: C Income tax payable 10,000
Current Assets: Notes payable, short-term 85,000
Cash P100,000 Accrued liabilities 4,000 244,000
Accounts receivable 200,000
Total liquid assets 300,000 Working Capital P351,000
Inventory 440,000
Total current assets P740,000 v. Answer: B
Current Liabilities: Current Ratio: Current Assets ÷ Current Liabilities
Accounts payable P 80,000 (P595,000 ÷ P244,000) = 2.44:1.00
Notes payable, due in 6 months 250,000
Interest payable 25,000 vi. Answer: A
Total current liabilities P355,000 Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00
Current Ratio (740,000 ÷ 355,000) 2.08:1.00
Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00 vii. Answer: D
AR Turnover: Credit sales ÷ Average AR
Before any payment, the current ratio is above 1:1 and acid test ratio is 6,500,000/650,000 = 10.0 times
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 viii. Answer: C
assets and current liabilities brings direct effect on the ratio, that is, equal Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts
increase in current assets and current liabilities causes the ratio to rise. Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
iv. Answer: A
Working capital equals the difference between the total current assets and ix. Answer: D
total current liabilities. Average Daily Sales: Annual credit sales ÷ Days’
Current Assets: P4 million ÷ 360 days = P11,111
Cash P 80,000
Marketable securities 250,000 Average Collection Period: Average Accounts Receivable ÷ Average
Accounts receivable 110,000 Daily Sales
Total liquid assets 440,000 [(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
Inventory 140,000
Prepaid expense 15,000 x. Answer: A
Total Current Assets P595,000 Sales P30,000

582

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

Add decrease in Accounts Receivable 1,000 xvi. Answer: A

Cash collected from sales P31,000 Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2P
950,000
xi. Answer: B Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000
Inventory Turnover: Cost of Goods Sold ÷ Average Inventory
Cost of goods sold P 900,000 Net sales: (P950,000 x 5) P4,750,000
Add Ending inventory 180,000 Cost of goods sold (P1,150,000 x 4) 4,600,000
Total cost available for sales 1,080,000 Gross margin P 150,000
Deduct cost of purchases 960,000
Beginning inventory P 120,000 xvii. Answer: B
Average Inventory: (P120,000 + P180,000) ÷ 2 P150,000 Current liabilities P 100,000
Inventory Turnover: (P900,000 ÷ P150,000) 6 times Long-term debt 400,000
An alternative computation of the inventory turnover is to use Net Sales Deferred income tax 10,000
instead of Cost of Goods Sold. Total Liabilities 510,000
Stockholders’
xii. Answer: D Preferred stock P 80,000
Average inventory: (P180,000 + P156,000) ÷ 2 P168,000 Common stock 100,000
Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times Premium on common stock 180,000
Retained earnings 170,000 530,000
xiii. Answer: A Total Assets P1,040,000
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

xiv. Answer: A xviii. Answer: D

Average Inventory: (P90,000 + P110,000) ÷ 2 P100,000 Times interest earned: Earnings before interest ÷ Interest
Inventory Turnover: (P330,000 ÷ P100,000) 3.3 times Income before tax (P48,000 + P46,000) P 94,000
Add Interest expense 35,000
xv. Answer: B Income before Interest expense P129,000
Average Inventory: (P672,000 + P576,000) ÷2 P624,000
Inventory Turnover: (P2,400,000 ÷ P624,000) 3.846 times TIE: P129,000 ÷ P35,000 3.7 times
Inventory Turnover in Days: 365 days ÷ 3.846 94.9 days
xix. Answer: A
Alternative Computation: TIE: Income before interest expense ÷ Interest expense
Average daily cost of goods sold: = (P2,400,000 ÷ 365) P6,575.34 Income before income tax P400,000
Turnover in Days: P624,000 ÷ P6,575.34 94.9 days Add back Interest expense 100,000
Income before interest expense P500,000

583

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

Market price per share: (P10.5M ÷ 100,000) P105

TIE: P500,000 ÷ P100,000 5 times
xxvi. Answer: B
xx. Answer: C EPS: P50,000 ÷ 100,000 shares P0.50
Interest Expense: P1M x 0.1 P100,000 P/E Ratio: P4.00 ÷ P0.50 8 to 1
Income before interest expense: P350,000 + P100,000 P450,000
Times interest earned: (P450,000 ÷ P100,000) 4.5 times xxvii. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
xxi. Answer: C P/E Ratio: 144 ÷ 9 16
Net income P400,000
Add: Income taxes P300,000 xxviii. Answer: A
Interest 60,000 360,000 Payout Ratio: Common Dividends ÷ Income Available to Common
Income before interest P760,000 P120,000 ÷ P280,000 = 42.9%

TIE: P760,000 ÷ P60,000 12.67 times xxix. Answer: B

Price-earnings ratio: Market price ÷ EPS
xxii. Answer: B EPS: Net income ÷ /Weighted-average common shares
Earnings before interest expense (P20,000 x 4.5) P90,000 EPS: P200,000 ÷ 50,000 sharesP4.00
Deduct interest expense 20,000 P/E Ratio: P60 ÷ P4 15.0X
Income before income tax P70,000
Deduct income tax (P70,000 x 0.4) 28,000 xxx. Answer: C
Net income P42,000 Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
xxiii. Answer: D
Income to Common; (P240,000 – P20,000) P220,000 xxxi. Answer: D
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000 ROE: (8% x 1.25) 10.00%
Return on Common Equity: (P220 ÷ P960) 23 percent Last year’ (10%
– ÷ 15%) 33.33%
Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
xxiv. Answer: B Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
The dividend yield is 8 percent (P1.40 ÷ P17.50)
The dividend yield measures the return of investment in terms of xxxii. Answer: A
dividends received. The total expected returns consists of Dividend Yield 1 – (0.03 ÷ 0.05) = 40%
and the Appreciation in market price and dividend
xxxiii. Answer: B
xxv. Answer: D Degree of Financial Leverage: Operating Income ÷ Interest Expense
Market Value of Equity (P3M x 3.5) P10,500,000

584

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

xxxiv. Answer: A
Total stockholders’ ,000,000 xxxix. Answer: A
Deduct: Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2P
Liquidation value of Preferred Stock (50,000 s P110) P5,500,000 950,000
Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000 Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000
Common Equity P2,200,000
Net sales: (P950,000 x 5) P4,750,000
Book Value per Share: P2.2M ÷ 400,000 shares P5.50 Cost of goods sold (P1,150,000 x 4) 4,600,000
Gross margin P 150,000
xxxv. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares xl. Answer: C
P140,000 ÷ 10,000 shares = P14.00 Dividend per share: 0.75 x P2.20 P1.65
Market price: 10 x 2.20 22.00
xxxvi. Answer: A Dividend yield: P1.65 ÷ P22.00 = 7.5%
The inventory amount can be calculated as follows:
Current liabilities: Working Capital = current liabilities based on 2:1 xli. Answer: D
current ratio. At 2:1 current ratio, the amount of working capital and EBIT 1,250,000
current liabilities are both P1,120,000. Less interest expense 250,000
Earnings before tax 1,000,000
Inventory: Current liabilities x (Current ratio – Acid test ratio) Less Income tax 40% 400,000
P1,120,000 x (2.0 – 1.25) P840,000 Net income 600,000
Less Preferred dividends 200,000
A detailed computation can be made as follows: Earnings to Common Stock 400,000
Current assets: P1,120,000 x 2 P2,240,000 Earnings per share 400,000/25,000 16.00
Liquid assets: P1,120,000 x 1.25 1,400,000 Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40
Inventory P 840,000
Dividend yield 6.4 ÷ (16 x 5) 8.0%
xxxvii. Answer: C
Inventory balance: Gross profit ÷ (Difference between 2 inventory xlii. Answer: B
turnovers) ROA: Operating income ÷ Average Total Assets
360,000/(15 – 10.5) = P80,000 P145,000 ÷ P1,430,000 = 10.1%

xxxviii. Answer: A xliii. Answer: B

Inventory balance (P120,000 x (2.0 – 1.5) P 60,000 Return on stockholders’ : Net income ÷ Average stockholders’
Cost of goods sold 60,000 x 8 P480,000 equity
Sales (P480,000 ÷ 0.60) P800,000 P115,000 ÷ P1,027,500 = 11.2%

585

Downloaded by meciashe tan (meciashet@gmail.com)

 lOMoARcPSD|29751065

Financial Statement Analysis

xliv. Answer: C
Net income P115,000
Deduct Preferred Dividends 9,000
Income available to common shares P106,000

EPS: (P106,000 ÷ 60,000) P1.77

xlv. Answer: A
P/E Ratio: P30 ÷ 1.766 = 17.0 times

586

Downloaded by meciashe tan (meciashet@gmail.com)