Mas.m-1404. Financial Statements Analysis

STRAIGHT PROBLEMS 1. FINANCING RATIOS. Yolanda Corporation and Pablo Company disclose the following data on their balance sheet (in thousands): Debt, 10% Shareholders’ equity Total equity Earnings before interest and taxes Interest expense

Yolanda Corp. Pablo Corp. P 250,000 P 500,000 500,000 250,000 P 750,000 P 750,000 P 375,000 P 375,000 25,000 50,000

Required: a. For each company, compute the following Ratios Formula a. Debt rate Total Debt/Total Assets b. Debt-equity ratio Debt/SHE c. Equity multiplier Total Equity/SHE d. Times interest earned EBIT/Interest expense

Yolanda Corp. 33% 0.50:1 1.50x 15.00

Pablo Corp. 67% 2:1 3x 7.50

b. Comment on the data you have computed. 2. INVESTING RATIOS. Char Corp. and Maine Co. revealed the following information on their published financial statements for the 2013 business operations (in thousands):

Current assets Investments Property, plant, and equipment Intangibles Other assets Total assets

Char

Maine

P640,000 56,000 56,000 32,000 16,000 P800,000

P225,000 500,000 50,000 15,000 10,000 P800,000

Required : For each company, determine the ratio component of each asset over the total assets. Comment on the data you computed Current Assets Investments Property, Plant and Equipment Intangibles Other Assets Total Assets

Char 80% 7 7 4 2 100%

Maine 28% 63 6 2 1 100%

3. HORIZONTAL AND VERTICAL ANALYSIS. The financial position of Primus Company at the end of 2012 and 2013 is as follows (pesos in thousands): 2013

2012

P3,000 40,000 27,000 15,000 100,000 10,000 5,000 P200,000

P5,000 25,000 30,000 0 75,000 10,000 20,000 P165,000

P30,000 88,000 118,000

P47,000 74,000 121,000

10,000 54,000 5,000 13,000 82,000 P200,000

9,000 42,000 5,000 (12,000) 44,000 P165,000

Assets Cash and cash equivalents Trade and other receivables Inventory Investment property Property plant, and equipment (net) Intangible assets Other noncurrent assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Shareholders’ Equity 8% Preference equity Ordinary equity Share premium Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

Sales and cost of goods sold insignificantly change in 2013 in relation with 2012. Required: 1. Prepare a comparative balance sheet showing peso and percentage changes for 2013 as compared with 2012. 2. Prepare a common-size balance sheet as of December 31, 2013 and 2012. 3. Based on your data derived in requirements 1 and 2, comment on the financial position of W Company as of December 31, 2013. 4. COMPARATIVE AND COMMON-SIZE ANALYSIS. The operating activities of Franco Company for the year ended December 31, 2013 and 2012 are summarized below: (in thousands) 2012 2013 Sales P440,000 P480,000 Cost of Goods Sold (242,000) (360,000) Selling and General Expenses (118,800) (96,000) Interest expense (30,800) (33,600) Profit (loss) before income tax 48,400 (9,600) Income tax (refund) 19,360 (3,840)

Profit (loss)

P29,040

P(3,760)

Required: a. Prepare a horizontally analyzed Statement of Profit or Loss for 2013 and 2012. b. Prepare a common-size Statement of Profit or Loss in 2013 and 2012. c. Based on the above percentages, comment on the Ma. Co.’s results of operations for 2013. 5. TREND RATIOS. G Corporation’s sales, current assets, and current liabilities have been reported as follows over the last five years (amount in thousands): 2013 Sales P10,800 Current assets 2,626 Current liabilities 475

2012 P 9,600 2,181 450

2011 P 9,200 2,220 350

2010 P 8,640 2,267 325

2009 P 8,000 2,225 250

Required: Express all the sales, current assets, and current liabilities on trend index. Round your decimals up to 2 places. a. Use 2009 as the base year. b. Use 2013 as the base year. 6. PROFITABILITY RATIOS. The following data were taken from the records of F Company and T company (amounts in thousands and balance sheet data are on average) F Co. P 80,000 3,050 50 12,000 6,000 200 600 40%

Sales Profit (loss) Interest expense Total assets Ordinary shareholder’s equity Preference dividends, cumulative No. of ordinary shares outstanding Tax rate

T Co. P 10,000 640 40 2,000 500 200 50 40%

Required: Determine the following for F Company and T Company.

7. BASIC PROFITABILITY RATIOS. Find the missing data (amount in millions). a

b

c

Net income Net sales Total Assets Shareholder’s equity Ordinary shares outstanding Profit margin Asset turnover ROA ROE EPS

P50 P1,000 P400 P150 1,000,000 ? ? ? ? ?

? 4,000 ? ? 1,000,000 20% 0.2 ? 10% ?

? ? P3,000 ? 1,000,000 ? ? 12% 10% ?

8. BASIC PROFITABILITY RATIOS. Find the missing data. Profit margin Asset turnover Equity multiplier ROE Debt ratio Hint: EM = 1/ER

a 10% 4 1.25 ? ?

b 12% 5 ? ? 40%

c 10% ? ? 20% 25%

9. BASIC GROWTH RATIOS. Consider the following data for the year ended December 31, 2012: R Co. J Co. Earnings per share P 50 P 200 Market price per ordinary share 150 500 Dividend per ordinary share 40 120 Dividend per preference share 10 20 Total shareholder’s equity Pl0 million P60 million Ordinary shares outstanding 1 million 4 million Preference shares outstanding 500,000 2 million, cumulative Peference shares liquidation value P1.30 per share P1.30 per share 10. BASIC GROWTH RATIOS.2. Find the missing data. a P/O rate 96%? P/E rate 8 Yield rate 12% Retention rate 4% ? Hint: P/O rate = P/E Rate x yield Rate

b 40% 50% ? 80% 60% ?

c 75% ? 40% 187.5% ? 25%

11. BASIC LIQUIDITY RATIOS. You are asked by the Chief Financial Officer of D Corporation to analyze its liquidity position in 2012. You have gathered the following data from the records of the company and industry published reports (in thousands):

D Corp P3,500 8,000 6,500 14,000 200,000 250,000 130,000 140,000 180,000 30,000

Average cash Average trade receivables Average inventory. Average trade payables Net credit sales Net sales Cost of sales Net credit purchases Net purchases Daily cash operating expenses

Industry Average P2,000 10,000 7,000 12,000 150,000 210,000 112,000 96,000 120,000 42,000

The company uses a 360-day a year base. The credit terms offered to customers are 2/10, n/40. Suppliers give credit terms of 3/20, n/40. Required: a. For D Corporation and the industry, compute the following (days are rounded): 1. Receivables turnover 2. Collection period 3. Inventory Turnover 4. Days to sell inventory 5. Payables turnover 6. Payment period 7. Operating cycle 8. Net cash cycle 9. Net working capital 10. Working capital turnover 11. Current ratio 12. Quick-assets ratio 13. Defensive interval ratio

Formulas NCS/AR 360/RT CGS/Invty 360/IT NCP/AP 360/PT CP+ID OC-PP CA-CL NS/NWC CA/CL QA/CL Quick Assets/Daily cash operating expenses

D Corp. 25 15 20

Industry Average 15 24 16

b. Comment on the ratios computed 12. EFFECTS OF LEVERAGE ON RETURN ON ORDINARY EQUITY. You are in the process of organizing a new company to produce and sell a lady beauty product. You feel that P5 million would be enough to finance the new company’s operations. You are considering following financing mix in raising the needed money for investment.

Straight ordinary equity : All the PS million would be raised by issuance of ordinary shares. Shareholders’ equity mix: P3.5 million would be raised from ordinary shares issuances and P1.5 million from the sale of P100 pr, 10%, preference stock. Leverage and equity mix: P3.0 million would be obtained from ordinary shares issuances and P2.0 million from issuance of a 12% bonds payable. You estimated that the operations would generate an earning of P2 million each year before interest and taxes. The tax rate is 40%. Required: Determine the best financing mix that would maximize return on ordinary equity.

MULTIPLE CHOICE QUESTIONS BASIC CONCEPTS 1. Which of the following does not belong to the list? A. Common-size financial statements.

B. Peso and percentage changes on financial statements. C. Financial ratios. D. Long-form report 2. When a balance sheet amount is related to an income statement amount in computing a ratio. A. The income statement amount should be converted to an average for the year. B. Comparison with industry ratios are not meaningful C. The balance sheet amount should be converted to an average for the year. D. The ratio loses its historical perspective because a beginning of the year amount is combined with an end of the year amount. 3. A major problem in comparing profitability measures among companies is the A. Lack of general agreement over which profitability B. Differences in the size of the companies C. Differences in the accounting methods used by the companies D. Differences in the dividend policies of the companies HORIZONTAL AND TREND ANALYSIS 4. In financial statement analysis, expressing all financial statement items as a percentage of base year amounts is called A. Horizontal common-size analysis B. Vertical common-size analysis C. Trend analysis D. Ratio analysis 5. In 2011, MPX Corporation’s net income was P800,000 and in 2012 it was P200,000. What percentage increase in net income must MPX achieve in 2013 to offset the 2012 decline in net income? A. 60% B. 600% C. 400% D. 300% 6. The following ordinary size income statement is available for S Corporation for the two years ended December 31, 2013, and 2012 2013 2012 Sales 100% 100% Cost of sales 55 70 Gross profit on sales 45 30 Operating expenses (including income tax expense) 20 18 Net income 25% 12% The trend percentages for sales are as follows: 2012 2011

130% 100%

What should be the trend percentage for gross profit on sales for 2013? A. 58.5 B. 130% C. 150% D. 195% Questions 7 and 8 are based on the following information: 7. K Co. is preparing its ordinary-size financial statements and revealed the following information: (in thousands of pesos) Accounts receivable 10,000 Inventory 20,000 Total current assets 35,000 Total assets 84,000 Bonds payable 21,000 Retained earnings 7,000 Sales revenue 75,000 Cost of goods sold 62,000 Income taxes expense 22,000 7. How would K’s inventory appear on a ordinary-size balance sheet? A. 11.9 % B. 23.8% C. 57.15% D. 65.3 % 8. How would K’s retained earnings appear on a ordinary-size balance sheet? A. 8.3% B. 9.4% C. 20.0% D. 33.3% 9. Index numbers would probably be most interested in which ratio? A. Trend analysis. C. Vertical analysis. B. Ratio analysis. D. Ordinary-size statements. VERTICAL ANALYSIS 10. An income statement showing only component percentages is known as A. Common pesos statement B. Condensed income statement C. Common-size income statement D. Comparative income statement 11. In assessing the financial prospects for a firm, financial analysts use various techniques. Which of the following is an example of vertical ordinary-size analysis? A. an assessment of the relative stability of a firm’s level of vertical integration. B. a comparison in financial ratio from between two or more firms in the same industry. C. a statement that current advertising expense is 2% greater than in the prior year. D. a statement that current advertising expense is 2% of sales. 12. Horizontal, vertical, and ordinary-size analyses are techniques that are used by analysts in understanding the financial statements of companies. Which of the following is an example of vertical, ordinary-size analysis? A. Commission expense in 2013 is 10% greater than it was in 2012 B. A comparison in financial ratio from between two or more firms in the same industry C. A comparison in financial form between two or more firms in different industries

D. Commission expense in 2013 is 5% of sales. LEVERAGE RATIOS (FINANCING RATIOS) questions 13 and 14 are based on the following data: Gold Corporation Selected Financial Data For the Year ended December 31, 2013 Operating Income Interest expense Income before income tax Income tax expense Profit Preference share dividends Profit available to ordinary shareholders Ordinary shares dividends Increase in retained earnings

P900,000 100,000 800,000 320,000 480,000 200,000 280,000 120,000 160,000

13. The times interest earned ratio is A.2.8 to 1 B.4.8 to 1 C.8.0 to 1

D. 9.0 to 1

14. The times preference dividend earned ratio is A. 1.4 to 1 B. 1.7 to C. 2.4 to 1

D. 4.0 to 1

QuestiOns 15 nd 16 are based on the following information. Selected data from financial statements for the Years indicated ar prepared in thousands: Net Sales Cost of goods sold Interest expense Income tax Gain on disposal of a segment (net of tax) Administrative expense

Cash Trading securities Accounts receivable (net) Merchandise inventory Tangible fixed assets

Year 2 P32 169 210 440 480

Year 2 Operations P4,175 2,880 50 120 950 385

December 31 Year 1 P 28 172 204 420 420

Current liabilities Total liabilities Ordinary shares outstanding Retained earnings

370 790 225 361

268 225 210 380

15. The firm’s interest-earned ratio for M Corp. for year 2 is: A. 0.57 times C. 3.50 times B. 7.70 times D. 6.90 times 16. The total debt-to-equity ratio for M Corp in year 2 is A. 3.49 B. 0.77 C. 2.07 D. 1.30 17. The following information pertains to AL Corporation as of and for the year ended Dec. 31, 2013? Liabilities P 60,000 Shareholders’ equity P 500,000 Ordinary shares issued and outstanding 10,000 shares Net income P 30,000 During 2013, AL officers exercised share options for 1,000 shares of share at an option price of P8 per share. What was the effect of exercising the share option? A. No ratios were affected B. Assets turnover increased to 5.4% C. Debt to equity ratio decreased to 12% D. Earnings per share increased by P0.33 18. It refers to the practice of financing assets with borrowed capital. Its extensive use may impact on return on ordinary shareholders’ equity to be above or below the rate or return on total assets. A. Discounting. C. Leverage. B. Mortgage. D. Arbitrage. 19. When compared to a debt-to-asset ratio, a debt-to-equity ratio would A. Be lower than the debt-to-asset ratio B. Be higher than the debt-to-asset ratio C. Be about the same a the debt-to-asset ratio D. Have no relationship at all to the debt-to-asset ratio 20. If the ratio of total liabilities to shareholders equity increases, a ratio that must also increase is A. Time interest ratio B. The current ratio C. Total liabilities to total assets D. Return on shareholder’s equity 21. A measure of the company’s long-term debt paying ability is A. Return on assets C. Dividend payout

B. Times interest earned

D. Length of the operating cycle

22. The relationship of the total Debt to the total equity of a corporation is a measure of A. Liquidity C. Creditor risk B. Profitability Solvency 23. In the process of investing of surplus cash, the term “riding the yield curve” refers to A. Diversifying securities portfolio so that the firm has an equal balance of long-term versus short-term securities. B. Swapping different maturities of similar quality Debt securities in order to obtain higher yield. C. purchasing only the longest maturities for given rates of return. D. Adherence to the liquidity preference theory of securities investment 24. The company issued new ordinary shares in a three-for-one share split. Identify the statements that indicate the correct effect(s) of this transaction. 1. It reduces equity per share of ordinary share. 2. Share of each ordinary shareholder is reduced 3. The peso amount of capital share is increased. 4 Working capital and current ratio are increased. A. Statements 1 and 4 only are correct B. Statement 1 only is correct C. All four statements are correct D. Statements 3 and 4 only are correct PROFITABILITY RATIOS 25. Which of these ratios are measures of a company’s profitability: 1.Earnings per shares 5. Return on assets 2. Current ratio 6. Inventory turnover 3. Return on sales 7. Receivable turn-over 4. Debt-equity ratio 8. price earnings ratio A. All eight ratios B. 1, 3, 5 and 8 only C. 1,3,5,6,7 and 8 only D. 1, 3 and S only 26. F Corporation’s books disclosed the following information as of & for the year ended Dec. 31, 2013: Net Credit Sales Net Cash Sales Merchandise Purchases Inventory At Beginning Accounts Receivable At Beginning Accounts Receivable At End Profit

P2,000,000 500,000 1,000,000 600,000 200,000 700,000 100,000

F’s percent of net income on sales is A.4% C. 44% B. 9% D. 56% Questions 27 to 29 are based on the following information: Northern Division reported the following results for 2013: Annual sales P500,000 Net earnings 80,000 Investment 250,000 27. What is Northern Division’s return on sales? A. 16% B. 20% C. 25%

D. 32%

28. What is Northern Division’s asset turnover? A.0.5 to 1 B. l to l C.2 to l

D.3.125 to 1

29. What is Northern Division’s return on investment? A. 10% B. 16% C. 24%

D. 32%

30. J Goods, Inc. has a total asset turnover of 0.30 and a profit margin of 10 percent. The president is unhappy with the current return on assets; and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 15 percent and (2) by increasing the total assets turnover. What new asset turnover ratio, along with the is percent profit margin, is required to double the return on assets? A. 35% B. 45% C. 40% D. 50% 31. JE & Co. has a Debt ratio of OSO, a total assets turnover of 0.25, and a profit margin of 10%. The president is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 14% and (2) by increasing debt utilization. Total assets turnover will not change. What new debt ratio, along with the 14% profit margin, is required to double the return on equity? A. 0.75 B. 0.70 C. 0.65 D. 0.55 32. A fire has destroyed many of the financial records of R. Son & Co. You are assigned to put a financial report. You have found the return on equity to be 12% and the debt ratio was 0.40. What was the return on assets? A.5.35% B.8.4% C. 6.60% D. 7.20% 33. Selected information for M Corp is as follows:

Preference shares Ordinary shares Retained earnings Profit for year ended

December 31 2012 P180,000 648,000 192,000 144,000

2013 P180,000 840,000 360,000 240,000

What is M’s rate of return on average shareholders’ equity for 2013? A. 16.0% B. 20.0% C. 23.5% D. 26.0% 34. Selected information for V Company is as follows:

Preference shares, 8%, par P100 nonconverte, non-cumulative Ordinary shares Retained earningS Dividends paid on Preference share for the year ended Profit for the year then ended

December 31 2012

2013

P125,000 300,000 75,000 10,000 50,000

P125,000 400,000 185,000 10,000 120,000

Y Co.’s return on ordinary shareholders’ equity, rounded to the nearest percentage point, for 2013 is A. 8.3% B. 19% C. 23% D. 25% Questions 35 to 38 are based on the following information: The management of Q Corporation is preparing its plans for the year 2013. The average assets to be employed for the year are estimated at P2,600,000 with 20% of this amount borrowed at no interest cost. Materials and labor cost for the’ year is budgeted at p4,000,OO° while operating costs is estimated at p1,500,000 All sales are to be billed at 162.5% of materials and labor cost. Income taxes is an average of 35% of income before income tax. 35. The estimated rate of return on sales for 2013 is A. 10.00% B. 12.50% C. 14.29%

D. 27.86%

36. The estimated rate of return on average total assets for 2013 is A. 20.00% B. 25.00% C. 31.25% D. 40.50%

37. The expected asset turnover for 2013 is A. 20.00% B. 25.00% C. 31.25%

D. 40.50%

38. The rate of return on shareholders’ equity for 2013 is A. 1.5 times C. 3.36 times B. 2.5 times D. 3.75 times 39. If the return on total assets is 10% and if the return on ordinary shareholders’ equity is 12% then A. The after-tax cost of long-term debt is probably greater than 10%. B. The after-tax cost of long-term debt is 12%. C. Leverage is negative.

D. The after-tax cost of long-term debt is probably less than 10%. 40. Which of the following is an appropriate computation for return on investment? A. Income divided by total assets B. Income divided by sales C. Sales divided by total assets D. Sales divided by shareholders’ equity 41. Financial ratio, which assess the profitability of a company, include all of the following except the A. Dividend yield ratio C. Earnings per share ratio B. Gross profit percentage D. Return on sales ratio 42. Which of the following statements is incorrect? A. Profitability evaluation ratios have a higher power than solvency determination ratios predicting for performance for both income and solvency. B. Gross profit percentages do not vary a great deal among industries. C. It is appropriate to compare a company’s current financial ratio with same financial ratio for (1) that company in prior years and/or (2) the ratio for the industry in which the company is affiliated. D. Companies which product costs present a high percentage of total costs could be expected to have a low gross profit percentage. 43. This ratio of analytical measurement measures the productivity of assets regardless of capital structures A. Return on total assets. B. Current ratio B. Quick ratio. D. Debt ratio GROWTH RATIOS 44. At December 31, 2012, LM, Inc., had 100,000 shareS of PlO par value ordinary share issued and outstanding. There was no change in the number of shares outstanding during 2013. Total shareholders’ equity at December 31, 2013, P2,800,000. The net income for the year ended December 31, 2013, was P800,000. During 2013 LM paid P3 per share in dividends on its ordinary share. The quoted market value of LM’s ordinary share was P48 per share on December 31, 2013. What was the price-earnings ratio on ordinary share for 2013? A. 9.6 to 1 B. 8.0 to 1 C. 6.0 to 1 D. 3.5 to 1 45. Data pertaining to CA Corp.’s ordinary share are presented for the fiscal year ending May 31, 2013: Ordinary share outstanding Stated value per share Market price per share 2007 dividends paid per share 2008 dividends paid per share Basic earnings per share

P750,000 15.00 45.00 4.50 7.50 11.25

Diluted earnings per share

9.00

The price earnings ratio of ordinary share of CA Corp is: A. 3.0 times. C. 6.0 times. B. 7.0 times. D. 5.0 times. 46. Associated Co. paid out one-half of its 2012 earnings by dividends. Its earnings increased by 20% and the amounts of its dividends increased by 15% in 2013. Associated dividend payout ratio for 2013 was A. 51.5% B. 52.3% C. 75.00% D. 47.90% 47. Given a year’s end net income of P1.5 million and 50,000 ordinary shares outstanding throughout the year with market price per share at year’s being P120, the price-earnings ratio is: A. 2 times. B. 3 times. C. 4 times. D. 5 times. 48. The following data pertain to A Corporation for the calendar year 2013: Net income Dividends paid on ordinary share Ordinary share 0utstanding (unchanged during the year)

240000 120,000 300,000 shares

The market price per share of A’s ordinary share at December 31, 2013 was P12. The price- earnings ratio at December 31, 2013 was A. 9.6 to 1 B. 10.0 to 1 C. 15.0 to 1

D. 30.0 to 1

Items 49 and 50 are based on the following data: P Company was organized on January 2, 2013, with the following capital structure: 10% cumulative preference share, pare value P100 and liquidation value, P105; authorized, issued and outstanding 1,000 shares P 100,000 Ordinary share, par value P25, authorized 100,000 sharea; issued and outstanding 10,000 shares P 250,000 P’s net income for the year ended December 31, 2013, was p450,000, but no dividends were declared. 49. How much was P’s book value per preference share at December 31, 2013? A. P100 B. P105 C. P110 D. P115 50. How much was P’s book value per ordinary share at December 31, 2013? A. P45.00 B. P68.50 C. P69.50 D. P70.00 51. H Corporation’s shareholders’ equity at December 31, 2013, consisted of the following Preference share, P50 par value, 10% noncumulative 10,000 shares issued and 0utstanding P500,000 Ordinary share, Pl0 par value; 80,000 shares issued and outstanding 800,000

Retained earnings

300,000

The preference share has a liquidating value of P55 per share. At December 31, 2013, the book value per share of ordinary share is A. P14.38 B. P13.75 C. P 13.13 D. P10.00 52. R Corporation’s current balance sheet reports the following shareholders’ equity balances: 5% cumulative preference share, P100 par value, 2,500 shares issued and outstanding P 250,000 Ordinary share, P3.50 par value, 100,000 shares issued and outstanding 350,000 Share premium 125,000 Retained earnings 300,000 Dividends in arrears on the preference share amount to P25,000. If R were to be liquidated, the preference shareholders would receive par value plus a premium of P50,000. The book value per share of ordinary share is A. P7.75 B. P7.50 C. P7.25 D. P7.00

53. V Corporation was authorized to issued 1,000 shares of p100 par, 8% cumulative preference share and 100,000 shares of P100 par ordinary shari. The equity account balances at December 31, 2013 are as follows: Cumulative preference share P50,000 Ordinary share 90,000 Share premium 9,000 Retained earnings 13,000 Treasury share, ordinary — 100 shares at cost (2,000) Dividends On preference share are in arrears for the year 2009. The book value of a share of ordinary share at December 31, 2013 should be A. P117.80 B. P119.10 C. P122.50 D. P123.60 54. For a company that has only ordinary share outstanding, total shareholders’ equity divided by the number of shares outstanding represents the A. Return on equity. C. Book value per share. B. Stated value per share. D. Price-earnings ratio. 55. How are the dividends per share for ordinary share used in the calculation of the following? Payout ratio Earnings per share A. Denominator Denominator B. Denominator Not used C. Numerator Not used

D.

Numerator

Numerator

56. How are the following used in the calculation of the dividend payout ratio for a company with only ordinary share outstanding? Dividends per Earnings Book value share per share per share A. Denominator Numerator Not used B. Denominator Not used Numerator C. Numerator Denominator Not used D. Numerator Not used Denominator

LIQUIDITY RATIOS 57. Information from M Corporation’s balance sheet is as follows: Current assets: Cash P 2,400,000 Held for trading 7,500,000 Accounts receivable 66,300,000 Inventories 57,600,000 Prepaid expenses 1,200,000 Total current assets P135,000,000 Current liabilities: Notes payable Accounts payable Accrued expenses Income taxes payable Payments due within one year on long-term-debt Total current liabilities

P 1,500,000 19,500,000 12,500,000 500,000 3,500,000 P 37,500,000

What is the quick (acid) test ratio? A. 2.03 to 1 C. 1.99 to 1 B. 1.80 to 1 D. 3.60 to 1 58. A Corporation’s books disclosed the following information as of and for the year ended December 31, 2013:

Net credit sales Net cash sales Accounts receivable at beginning Accounts receivable at end

P3,000,000 480,000 400,000 800,000

A’s accounts receivable turnover is A. 3.75 times C. 5.00 times B. 4.35 times D. 5.80 times 59. Selected information from the operating records of Kay Company is as follows: Net sales P1,800,000 Cost of goods sold for 2013 1,200,000 Inventory at 12/31/12 360,000 Inventory at 12/31/13 312,000 Kay’s inventory turnover for 2013 is A. 3.57 times C. 5.36 times B. 3.85 times D. 5.77 times

60. Given an acid test ratio of 2.0, current assets of P5,000, and inventory of P2,000, the value of current liabilities is A. P1,500 C. P3,500 B. P2,500 D. P6,000 (cia) 61. Based on the data presented below, what is Beta Corporations cost of sales for the year? Current ratio 3.5 Acid test ratio 3.0 Year-end current liabilities P600,000 Beginning Inventory P500,000 Inventory turnover 8.0 A. P1,600,000 B. P2,400,000

C. P3,200,000 D. P6,400,000 (cma)

62. During 2013, L Company purchased P960,000 of inventory. The cost of goods sold for 2013 was P900,000, and the ending inventory at December 31, 2013 was P180,000. What was the inventory turnover for 2013? A. 6.4 B. 6.0 C. 5.3 D. 5.0 63. Selected information from the accounting records of J Company is as follows: Net sales for 2013 P 1,800,000 Cost of goods sold for 2013 1,200,000 Inventories at December 31, 2012 336,000 Inventories at December 31, 2013 288,000

Assuming there are 300 working days per year, what is the number of day’s sales in average inventories for 2013. A. 78 B. 72 C. 52 D. 48 64. The following computations were made from B Company’s 2013 books Number of days sales in inventory 61 Number of days sales in trade accounts receivable 33 What was the number of days in B’s 2013 operating cycle? A. 33 B. 94 C. 61 D. 47 65. If the average age of the inventory is 90 days, the average age of accounts payable is 60 days, and the average age of accounts receivables is 65 days, the number of days in the cash flow cycle is A. 95 days. C. 215 days. B. 125 days. D. 85 days.

66. Selected data from the year-end financial statements of U Corp. are presented below. The difference between average and ending inventories is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities P600,000 Inventory turnover (based on cost of sales) 8 times Gross profit margin 40% U’s net sales for the year were A. P2.4 million. C. P1.2 million. B. P4.0 million. D. P6.0 million. 67. O Corporation has current assets totaling P15 million and a current ratio of 2.5 to 1. What is O’s current ratio immediately after it has paid P2 million of its accounts payable? A 3.75 to 1 C.3.25 to 1 B.2.75 to 1 D.4.75 to 1 68. E Company’s net accounts receivable were P250,000 at December 31, 2012, and P300,000 at December 31, 2013. The accounts receivable turnover for 2013 was 5.0. What were E’s total net sales for 2013? A. P1,375,000 C. P1,600,000 B. P1,500,000 D. P2,750,000 69. It is the policy of F Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are p400,00° and the present current ratio is 2 to 1. How much is the maximum level of new short-term loans it can secure without violating the policy? A. P400,000 C. P266,667

B. P300,000

D. P800,000

70. Mr. S, the owner of FT Co. is arguing with his accountant as to the best measure of liquidity. He was considering the following and you are to advise him which one is the best. Which one will you choose? A. Current assets minus inventories to current liabilities. B. Total assets minus goodwill to total liabilities. C. Net income minus dividends to interest expense. D. Sales minus returns to total Debt. 71. LT Corp. has an acid test ratio i.5 to 1.0. Which of the following will cause this ratio to deteriorate? A. payment of cash dividends previously declared B. Borrowing short term loan from a bank C. Sale of inventory on account D. Sale of equipment at a loss

72. How are trade receivables used in the calculation of each of the following Acid test (quick ratio) Receivable turnover A. Numerator Numerator B. Numerator Denominator C. Denominator Denominator D. Not used Numerator 73. If current assets exceed current liabilities, payments to creditors made on the last day of the month will A. Decrease current ratio B. Increase current ratio C. Decrease net working capital D. Increase net working capital 74. X, Inc. has current ratio of 4:1. Which of the following transactions would normally increase its current ratio? A. purchasing inventory on account B. purchasing machinery for cash C. Selling inventory on account D. Collecting an account receivable 75. Which of the following ratios measures short-term solvency? A. Current ratio B. Age of receivables C. Creditors’ equity to total assets

D. Return on investment 76. Shortterm creditors would probably be most interested in which ratio? A. Current ratio C. Debt-to-equity ratio B. Earnings per share D. Quick ratio. 77. On December 31, 2013, F Company collected a receivable due from a major customer. Which of the following ratios would be increased by this transaction? A. Inventory turnover ratio B. Quick ratio C. Receivable turnover ratio D. Current ratio 78. A company has a current ratio of 2 to 1. This ratio will decrease if the company A. receives a 5% share dividend on one of its marketable securities B. Pays a large account payable which had been a current liability C. Borrows cash on a six-month note D. Sells merchandise for more than cost and records the sale using the perpetual inventory method 79. How is the average inventory used in the calculation of each of the following? Acid test (quick ratio) Inventory turnover rate A. Numerator Numerator B. Numerator Denominator C. Not used Denominator D. Not used Numerator 80. The ratio that measures a firm’s ability to generate earnings from its resources is A. Days’ sales in inventory C. Sales to working capital B. Asset turnover D. Days’ sales in receivables 81. XO Co. has a high sales-to-working capital ratio. This could indicate A. The firm is undercapitalized B. The firm is likely to have liquidity problems. C. Working capital is not profitability utilized. D. The firm is not profitable. 82. The ratio of sales to working capital is a measure of A. Collectibility C. Liquidity B. Operational leverage D. Financial leverage 83. Jack & Sons, Inc. has a 2 to 1 acid test (quick) ratio. This ratio would decrease to less than 2 to 1 if A. the company purchased inventory on open account. B. the company sold merchandise on open account that earned a normal gross margin. C. the company collected an account receivable. D. the company paid an account payable.

COMPREHENSIVE PROBLEMS Questions 84 through 87 are based on the following information: You are requested to reconstruct the account of OS Supplies for analysis. The following data were made available to you: Gross margin for 2013 amounted to P472,500. Ending balance of merchandise inventory was P300,000. Long-term liabilities consisted of bonds payable with interest rate of 20%. Total shareholders’ equity as of December 31, 2013 was P750,000. Gross margin ratio 35% Debt-to-equity ratio 0.8 to 1 Times interest earned 10 Quick ratio 1.3 to 1 Operating expenses to sales ratio 18%

84. What is the operating income for 2013? A. P472,500 C. P206,500 B. P243,000 D. P229,500 85. How much was the bonds payable? A. P400,000 C. P114,750 B. P200,750 D. P370,500 86. Total current liabilities would amount to A. P600,000 C. P485,250 B. P714,750 D. P550,000 87. Total current assets would amount to A. P630,825 C. P580,000 B. P780,000 D. P930,825 Questions 88 and 89 are based on the following information AA Corporation registered accelerated increase in its net income from p437,500 in 2012 to P1,260,000 in 2013. Rate of return on current assets increased from 25% in 2012 to 30% in 2013. Current asset turnover, on the other hand, went up to 2.87 turnovers in 2011 from 2.45 turnovers in 2012 88. The average investment in current assets of AA Corporation in 2013 was: A. P1,697,500 C. P4,200,000 B. P1,750,000 D. P5,040,000 89. The cost of goods sold and operating expenses, including depreciation, in 2013 amounted to: A. P10,794,000 C. P6,022,500 B. P5,022,500 D. P12,054,000