FS Analysis Bobadilla

MS (Bobadilla)

FS Analysis MODULE 10

FINANCIAL STATEMENT ANALYSIS THEORIES: 1. 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. Limitations 2. 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. 3. Which of the following is not a limitation of financial statement analysis? A. The cost basis. C. The diversification of firms. B. The use of estimates. D. The availability of information. Industry Analysis 4. 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. 5. 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. 6. 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. 7. 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. Common-sized financial statements 8. 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 9. 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 10. The percent of property, plant and equipment to total assets is an example of:

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MS (Bobadilla) A. vertical analysis B. solvency analysis

FS Analysis C. profitability analysis D. horizontal analysis

11. 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. 12. 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. Horizontal analysis 13. The percentage analysis of increases and decreases in individual items in comparative financial statements is called: A. vertical analysis C. profitability analysis B. solvency analysis D. horizontal analysis 14. Horizontal analysis is also known as A. linear analysis. B. vertical analysis.

C. trend analysis. D. common size analysis.

15. 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 amount in the subsequent year. D. There is a negative amount in the base year and a positive amount in the subsequent year. 16. 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. Trend analysis 17. 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 Risk and return 18. The present and prospective stockholders are primarily concerned with a firm’ A. profitability C. leverage B. liquidity D. risk and return 19. 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 Measures of Risk 20. 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 Financial ratios 21. 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. 22. 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

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MS (Bobadilla)

FS Analysis

23. 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 24. 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 25. Short-term creditors are usually most interested in assessing A. solvency. C. marketability. B. liquidity. D. profitability. 26. 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 27. Which of the following is the most of interest to a firm’s suppliers? A. profitability C. asset utilization B. debt D. liquidity Measures of liquidity 28. 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. 29. 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 30. 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 31. 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 32. 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 Not a measure of liquidity 33. 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. Current ratio 34. 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 35. 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.

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MS (Bobadilla)

FS Analysis

D. calculated by subtracting current liabilities from current assets. 36. 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 37. 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. Acid-test or quick ratio 38. A measure of a company’s immediate short-term liquidity is the A. current ratio. B. current cash debt coverage ratio. C. cash debt coverage ratio. D. acid-test ratio. 39. The acid-test or quick ratio A. is used to quickly determine a company’s solvency and long-term 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. Not a liquidity ratio 40. Which one of the following would not be considered a liquidity ratio? A. Current ratio. C. Quick ratio. B. Inventory turnover. D. Return on assets. Activity ratios Days receivable & receivable turnover Quality of receivables 41. 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 Days receivable 42. 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. Asset utilization ratios Performance measures 43. All of the following are asset utilization ratios except: A. average collection period C. receivables turnover B. inventory turnover D. return on assets Asset turnover 44. 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. 45. Total asset turnover measures the ability of a firm to: A. generate profits on sales

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FS Analysis

B. generate sales through the use of assets C. cover long-term debt D. buy new assets 46. 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. B. marketability. D. solvency. Financial Leverage 47. 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. 48. The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is sometimes referred to as: A. leverage C. yield B. solvency D. quick assets 49. 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 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. 50. 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 Measures of solvency 51. 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 52. 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 Fixed assets to long-term liabilities 53. 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 Debt ratio 54. 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

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FS Analysis

D. the magnification of earnings caused by leverage 55. 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. Debt-to-equity ratio 56. 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. Times interest earned 57. 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 Fixed charge coverage 58. 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 59. 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 Profitability ratios Interested parties 60. 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. 61. Stockholders are most interested in evaluating A. liquidity. C. profitability. B. solvency. D. marketability. Performance measures 62. 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 Earnings per share 63. 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 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

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FS Analysis

D. should be larger than return on equity Return on investments 66. Return on investment measures: A. return to all suppliers of funds B. return to all long-term creditors

C. return to all long-term suppliers of funds D. return to stockholders

Market test ratios Price-earnings ratio 67. 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 68. 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 Dividend yield 69. 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 Financial Statement Analysis Accounts Receivable 70. 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. 71. 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 Inventories 72. 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 73. 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. Current ratio 74. 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 Fixed asset turnover ratio 75. 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. Total asset turnover

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MS (Bobadilla)

FS Analysis

76. 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 Profitability analysis 77. 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. Debt ratio 78. 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 Sensitivity Analysis Current ratio 79. 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. 80. 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). 81. 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. 82. Which of the following actions will increase a firm's current ratio if it is now less than 1.0? A. Convert marketable securities to cash. B. Pay accounts payable with cash. C. Buy inventory with short term credit (i.e. accounts payable). D. Sell inventory at cost. Acid-test ratio 83. 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? A. B. C. D. Short-term borrowing Increase Increase Decrease Decrease Collection of receivable No effect Increase No effect Decrease Profit margin 84. Which of the following would most likely cause a rise in net profit margin? A. increased sales C. decreased operating expenses

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MS (Bobadilla) B. decreased preferred dividends

FS Analysis D. increased cost of sales

Return on assets 86. Return on assets cannot fall under which of the following circumstances? A. B. C. Net profit margin Decline Rise Rise Total asset turnover Rise Decline Rise

D. Decline Decline

Debt ratio 87. 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. 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. Times interest earned 88. 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. DuPont Analysis 89. Which of the following could cause return on assets to decline when net profit margin is increasing? A. sale of investments at year-end C. purchase of a new building at year-end B. increased turnover of operating assets D. a stock split 90. 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 PROBLEMS: Horizontal analysis i. 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: A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000 ii.

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: A. can be stated as 0% C. cannot be stated as a percentage B. can be stated as 100% increase D. can be stated as 200% increase

Liquidity ratios iii. 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? A. B. C. D. Current ratio Increase Decrease Increase Decrease Acid-test ratio Increase Decrease Decrease Increase 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:

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MS (Bobadilla) Accounts payable Accounts receivable Accrued liabilities Cash Income tax payable Inventory Marketable securities Notes payable, short-term Prepaid expenses

FS Analysis P145,000 110,000 4,000 80,000 10,000 140,000 250,000 85,000 15,000

iv. The amount of working capital for the company is: A. P351,000 C. P211,000 B. P361,000 D. P336,000 v. 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 vi. 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 vii. 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. viii. 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 A. 3.75 times C. 5.00 times B. 4.35 times D. 5.80 times Days receivable ix. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the beginning of the year and a balance of P410,000 at the end of the year. The net credit sales during the year amounted to P4,000,000. Using 360day year, what is the average collection period of the receivables? A. 30 days C. 73 days B. 65 days D. 36 days Cash collection x. 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 xi. 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 xii. 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

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MS (Bobadilla) Petals’ inventory turnover for 2007 is A. 5.77 times B. 3.85 times

FS Analysis C. 3.67 times D. 3.57 times

xiii. The Moss Company presents the following data for 2007. Net Sales, 2007 Net Sales, 2006 Cost of Goods Sold, 2007 Cost of Goods Sold, 2007 Inventory, beginning of 2007 Inventory, end of 2007 The merchandise inventory turnover for 2007 is: A. 5.6 C. 7.5 B. 15.6 D. 7.7

P3,007,124 P 930,247 P2,000,326 P1,000,120 P 341,169 P 376,526

xiv. 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 xv. 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 Turnover ratios Asset turnover Asset xvi. 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. Solvency ratios Debt ratio xvii. Jordan Manufacturing reports the following capital structure: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Premium on common stock Retained earnings What is the debt ratio? A. 0.48 C. 0.93 B. 0.49 D. 0.96 Times interest earned xviii. House of Fashion Company had the following financial statistics for 2006: Long-term debt (average rate of interest is 8%) Interest expense Net income Income tax Operating income

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P100,000 400,000 10,000 80,000 100,000 180,000 170,000

P400,000 35,000 48,000 46,000 107,000

MS (Bobadilla) What is the times interest earned for 2006? A. 11.4 times B. 3.3 times

FS Analysis C. 3.1 times D. 3.7 times

xix. 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 xx. 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 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 xxi. 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? A. 7.67 C. 12.67 B. 11.67 D. 13.67 Net income xxii. 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 Profitability Ratios Return on Common Equity xxiii. Selected information for Ivano Company as of December 31 is as follows: 2006 2007 Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 noncumulative Common stock 600,000 800,000 Retained earnings 150,000 370,000 Dividends paid on preferred stock for the year 20,000 20,000 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% B. 19% D. 23% Dividend yield xxiv. The following information is available for Duncan Co.: 2006 Dividends per share of common stock P 1.40 Market price per share of common stock 17.50 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.

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MS (Bobadilla)

FS Analysis

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 xxv. 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 P/E ratio xxvi. 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 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 xxvii. 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 xxviii. 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 & Payout ratio Use the following information for question Nos. 33 and 34: Terry Corporation had net income of P200,000 and paid dividends to 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. xxix. Terry Corporation’s price-earnings ratio is A. 3.8 times C. 18.8 times B. 15 times D. 6 times xxx. Terry Corporation’s payout ratio for 2007 is A. P4 per share B. 12.5 percent

C. 20.0 percent D. 25.0 percent

DuPont Model Debt ratio xxxi. 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?

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MS (Bobadilla) A. B. C. D.

FS Analysis

Total debt ratio must increase by .5 Total debt ratio must increase by 5 Total debt ratio must increase by 5% Total debt ratio must increase by 50%

xxxii.

Assume you are given the following relationships for the Orange Company: Sales/total assets Return on assets (ROA) Return on equity (ROE) The Orange Company’s debt ratio is A. 40% C. 35% B. 60% D. 65%

1.5X 3% 5%

Leverage Ratio Degree of financial leverage xxxiii. A summarized income statement for Leveraged Inc. is presented below. Sales P1,000,000 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 xxxiv. 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 xxxv.

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

Integrated ratios Liquidity & activity ratios Inventory xxxvi. 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

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MS (Bobadilla) The estimated inventory amount is: A. 840,000 B. 600,000

FS Analysis C. 720,000 D. 550,000

xxxvii.

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

Net sales xxxviii. 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% Mildred’s net sales for the year were A. P 800,000 C. P 480,000 B. P 672,000 D. P1,200,000 Gross margin xxxix. 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 Market Test Ratio Dividend yield xl. 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 A. 25.0% C. 7.5% B. 22.0% D. 10.0% xli. The following were reflected from the records of Salvacion Company: Earnings before interest and taxes Interest expense Preferred dividends Payout ratio Shares outstanding throughout 2006 Preferred Common Income tax rate Price earnings ratio The dividend yield ratio is A. 0.50 C. 0.40 B. 0.12 D. 0.08

P1,250,000 250,000 200,000 40 percent 20,000 25,000 40 percent 5 times

Comprehensive xlii. 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 P600,000 P560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000

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MS (Bobadilla)

FS Analysis

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 Paid-in capital in excess of par-common stock 60,000 60,000 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 xliii. 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 xliv. 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 xlv. 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

i.

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.

ii. Answer: C iii. 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 Current Ratio (740,000 ÷ 355,000) Acid-test Ratio (300,000 ÷ 355,000)

P100,000 200,000 300,000 440,000 P740,000 P 80,000 250,000 25,000 P355,000 2.08:1.00 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. iv. 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:

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MS (Bobadilla) Accounts payable Income tax payable Notes payable, short-term 85,000 Accrued liabilities Working Capital

FS Analysis P145,000 10,000 4,000

244,000 P351,000

v. Answer: B Current Ratio: Current Assets ÷ Current Liabilities (P595,000 ÷ P244,000) = 2.44:1.00 vi. Answer: A Acid-Test Ratio: Liquid Assets ÷ Current Liabilities (P440,000 ÷ P244,000) = 1.80:1.00 vii. Answer: D AR Turnover: Credit sales ÷ Average AR 6,500,000/650,000 = 10.0 times viii. Answer: C Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times ix. Answer: D Average Daily Sales: Annual credit sales ÷ Days’ Year P4 million ÷ 360 days = P11,111 Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales [(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days x. Answer: A Sales Add decrease in Accounts Receivable Cash collected from sales

P30,000 1,000 P31,000

xi. 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. xii. Answer: D Average inventory: (P180,000 + P156,000) ÷ 2 Inventory Turnover: (P600,000 ÷ P168,000) xiii. Answer: A Average Inventory: (P341,169 + P376,526) ÷ 2 Inventory Turnover: (P2,000,326 ÷ P358,847.50)

P168,000 3.57 times P358,847.50 5.6 times

xiv. Answer: A Average Inventory: (P90,000 + P110,000) ÷ 2 Inventory Turnover: (P330,000 ÷ P100,000)

P100,000 3.3 times

xv. Answer: B Average Inventory: (P672,000 + P576,000) ÷2 Inventory Turnover: (P2,400,000 ÷ P624,000) Inventory Turnover in Days: 365 days ÷ 3.846

P624,000 3.846 times 94.9 days

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MS (Bobadilla)

FS Analysis

Alternative Computation: Average daily cost of goods sold: = (P2,400,000 ÷ 365) Turnover in Days: P624,000 ÷ P6,575.34

P6,575.34 94.9 days

xvi. Answer: A Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 Average inventory; (P1.1M + P1.2M) ÷ 2 Net sales: (P950,000 x 5) Cost of goods sold (P1,150,000 x 4) Gross margin xvii.

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

P 950,000 P1,150,000 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 xviii.

Answer: D Times interest earned: Earnings before interest ÷ Interest Income before tax (P48,000 + P46,000) Add Interest expense Income before Interest expense

P 94,000 35,000 P129,000

TIE: P129,000 ÷ P35,000

3.7 times

xix. Answer: A TIE: Income before interest expense ÷ Interest expense Income before income tax Add back Interest expense Income before interest expense

P400,000 100,000 P500,000

TIE: P500,000 ÷ P100,000

5 times

xx. Answer: C Interest Expense: P1M x 0.1 Income before interest expense: P350,000 + P100,000 Times interest earned: (P450,000 ÷ P100,000) xxi. Answer: C Net income Add: Income taxes Interest Income before interest TIE: P760,000 ÷ P60,000 xxii.

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

xxiii.

Answer: D

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P100,000 P450,000 4.5 times

P300,000 60,000

P400,000 360,000 P760,000 12.67 times P90,000 20,000 P70,000 28,000 P42,000

MS (Bobadilla) Income to Common; (P240,000 – P20,000) Average Common Equity: (P750,000 + P1,170,000) ÷ 2 Return on Common Equity: (P220 ÷ P960)

FS Analysis P220,000 P960,000 23 percent

xxiv. 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 xxv.

Answer: D Market Value of Equity (P3M x 3.5) Market price per share: (P10.5M ÷ 100,000)

xxvi.

Answer: B EPS: P50,000 ÷ 100,000 shares P/E Ratio: P4.00 ÷ P0.50

P0.50 8 to 1

xxvii.

Answer: D EPS: (P1,200,000 – P300,000) ÷ 100,000 P/E Ratio: 144 ÷ 9

P9.00 16

P10,500,000 P105

xxviii. Answer: A Payout Ratio: Common Dividends ÷ Income Available to Common P120,000 ÷ P280,000 = 42.9% xxix.

xxx.

xxxi.

xxxii.

Answer: B Price-earnings ratio: Market price ÷ EPS EPS: Net income ÷ /Weighted-average common shares EPS: P200,000 ÷ 50,000 shares P4.00 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%) Proposed Debt Ratio 1 – (10% ÷ 20%) Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33%

10.00% 33.33% 50.00% 50.00%

Answer: A 1 – (0.03 ÷ 0.05) = 40%

xxxiii. Answer: B Degree of Financial Leverage: Operating Income ÷ Interest Expense xxxiv. Answer: A Total stockholders’ equity Deduct: Liquidation value of Preferred Stock (50,000 s P110) P5,500,000 Unpaid Preferred Dividends (P5M x 6%) 300,000 Common Equity Book Value per Share: P2.2M ÷ 400,000 shares

P8,000,000 5,800,000 P2,200,000 P5.50

xxxv. Answer: C Book Value per Share: Common Equity ÷ Outstanding Shares P140,000 ÷ 10,000 shares = P14.00 xxxvi. 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

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MS (Bobadilla)

FS Analysis

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) A detailed computation can be made as follows: Current assets: P1,120,000 x 2 Liquid assets: P1,120,000 x 1.25 Inventory

P840,000 P2,240,000 1,400,000 P 840,000

xxxvii. Answer: C Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers) 360,000/(15 – 10.5) = P80,000 xxxviii. Answer: A Inventory balance (P120,000 x (2.0 – 1.5) Cost of goods sold 60,000 x 8 Sales (P480,000 ÷ 0.60) xxxix. Answer: A Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 Average inventory; (P1.1M + P1.2M) ÷ 2 Net sales: (P950,000 x 5) Cost of goods sold (P1,150,000 x 4) Gross margin xl. Answer: C Dividend per share: 0.75 x P2.20 Market price: 10 x 2.20 Dividend yield: P1.65 ÷ P22.00 = 7.5% xli. 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)

P 60,000 P480,000 P800,000 P 950,000 P1,150,000 P4,750,000 4,600,000 P 150,000 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%

xlii. Answer: B ROA: Operating income ÷ Average Total Assets P145,000 ÷ P1,430,000 = 10.1% xliii. Answer: B Return on stockholders’ equity: Net income ÷ Average stockholders’ equity P115,000 ÷ P1,027,500 = 11.2% xliv.

Answer: C Net income Deduct Preferred Dividends Income available to common shares EPS: (P106,000 ÷ 60,000)

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

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P115,000 9,000 P106,000 P1.77