6 Financial Statement Analysis

Financial Statement Analysis

FINANCIAL STATEMENT ANALYSIS

THEORIES:6. Management is a user of financial analysis. Which of the following comments does not represent a

fair statement as to the management perspective?A. Management is always interested in maximum profitability.B. Management is interested in the view of investors.C. Management is interested in the financial structure of the entity.D. Management is interested in the asset structure of the entity.

Limitations1. 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.

2. 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.

5. Which of the following does not represent a problem with financial analysis?A. Financial statement analysis is an art; it requires judgment decisions on the part of the analyst.B. Financial analysis can be used to detect apparent liquidity problems.C. There are as many ratios for financial analysis as there are pairs of figures.D. Some industry ratio formulas vary from source to source.

77. The use of alternative accounting methods:A. is not a problem in ratio analysis because the footnotes disclose the method used.B. may be a problem in ratio analysis even if disclosed.C. is not a problem in ratio analysis since eventually all methods will lead to the same end.D. is only a problem in ratio analysis with respect to inventory.

Industry Analysis3. 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.

4. Which of these statements is false?A. Many companies will not clearly fit into any one industry.B. A financial service uses its best judgment as to which industry the firm best fits.C. The analysis of an entity's financial statements can be more meaningful if the results

are compared with industry averages and with results of competitors.D. A company comparison should not be made with industry averages if the company

does not clearly fit into any one industry.

Common-sized financial statements9. Which of the following generally is the most useful in analyzing companies of different

sizes?A. comparative statements C. price-level accountingB. common-sized financial statements D. profitability index

12. Statements in which all items are expressed only in relative terms (percentages of a base) are termed:A. Vertical statements C. Funds StatementsB. Horizontal Statements D. Common-Size Statements

10. The percent of property, plant and equipment to total assets is an example of:A. vertical analysis C. profitability analysisB. solvency analysis D. horizontal analysis

15. Vertical analysis is a technique that expresses each item in a financial statementA. 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.

17. In performing a vertical analysis, the base for prepaid expenses isA. total current assets. C. total liabilities.B. total assets. D. prepaid expenses in a previous year.


Horizontal analysis8. The percentage analysis of increases and decreases in individual items in comparative financial

statements is called:A. vertical analysis C. profitability analysisB. solvency analysis D. horizontal analysis

11. Horizontal analysis is also known asA. linear analysis. C. trend analysis.B. vertical analysis. D. common size analysis.

13. In which of the following cases may a percentage change be computed?A. The trend of the amounts is decreasing but all amounts are positive.B. There is no amount in the base year.C. There is a negative amount in the base year and a negative amount in the subsequent year.D. There is a negative amount in the base year and a positive amount in the subsequent year.

14. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of timeA. 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 analysis16. Trend analysis allows a firm to compare its performance to:

A. other firms in the industry C. other industriesB. other time periods within the firm D. none of the above

Risk and return29. The present and prospective stockholders are primarily concerned with a firm’

A. profitability C. leverageB. liquidity D. risk and return

69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?A. common stockholders C. preferred shareholdersB. general creditors such as banks D. bondholders

Measures of Risk54. The following groups of ratios primarily measure risk:

A. liquidity, activity, and common equity C. liquidity, activity, and debtB. liquidity, activity, and profitability D. activity, debt, and profitability

Financial ratios7. 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.

18. In the near term, the important ratios that provide the information critical to the short-run operation of the firm are:A. liquidity, activity, and profitability C. liquidity, activity, and equityB. liquidity, activity, and debt D. activity,debt, and profitability

75. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as:A. solvency and leverage C. solvency and liquidityB. solvency and profitability D. solvency and equity

Liquidity ratiosInterested parties19. The primary concern of short-term creditors when assessing the strength of a firm is the

entity’sA. short-term liquidity C. market price of stockB. profitability D. leverage

35. Short-term creditors are usually most interested in assessingA. solvency. C. marketability.B. liquidity. D. profitability.

36. The two categories of ratios that should be utilized to asses a firm’s true liquidity are theA. current and quick ratios C. liquidity and profitability ratiosB. liquidity and debt ratios D. liquidity and activity ratios

47. Which of the following is the most of interest to a firm’s suppliers?A. profitability C. asset utilizationB. debt D. liquidity


Measures of liquidity21. 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.

20. Which of the following is a measure of the liquidity position of a corporation?A. earnings per shareB. inventory turnoverC. current ratioD. number of times interest charges earned

37. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?A. Current ratio C. Asset turnoverB. Acid-test ratio D. Receivables turnover

51. Which of the following ratios would be least helpful in appraising the liquidity of current assets?A. Accounts Receivable turnover C. Current RatioB. Days’ sales in inventory D. Days’ sales in accounts receivable

53. Which ratio is most helpful in appraising the liquidity of current assets?A. current ratio C. acid-test ratioB. debt ratio D. accounts receivable turnover

Not a measure of liquidity79. 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 ratio24. 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 ratioB. current ratio D. days’ sales in receivables

22. The current ratio isA. calculated by dividing current liabilities by current assets.B. used to evaluate a company’s liquidity and short-term debt paying ability.C. used to evaluate a company’s solvency and long-term debt paying ability.D. calculated by subtracting current liabilities from current assets.

30. Which of the following ratios is rated to be a primary measure of liquidity and considered of highest significance rating of the liquidity ratios a bank analyst?A. Debt/EquityB. Current ratioC. Degree of Financial LeverageD. Accounts Receivable Turnover in Days

41. A weakness of the current ratio is A. the difficulty of the calculation.B. that it does not take into account the composition of the current assets.C. that it is rarely used by sophisticated analysts.D. that it can be expressed as a percentage, as a rate, or as a proportion.

Acid-test or quick ratio42. 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.

23. The acid-test or quick ratioA. 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 ratio28. 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 turnoverQuality of receivables25. Which of the following does not bear on the quality of receivables?

A. shortening the credit termsB. lengthening the credit termsC. lengthening the outstanding periodD. all of the above bear on the quality of receivables

Days receivable27. 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 ratiosPerformance measures65. All of the following are asset utilization ratios except:

A. average collection period C. receivables turnoverB. inventory turnover D. return on assets

Asset turnover63. 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.

66. Total asset turnover measures the ability of a firm to:A. generate profits on salesB. generate sales through the use of assetsC. cover long-term debtD. buy new assets

76. A measure of how efficiently a company uses its assets to generate sales is the A. asset turnover ratio. C. profit margin ratio.B. cash return on sales ratio. D. return on assets ratio.

Solvency ratios

Interested parties50. Long-term creditors are usually most interested in evaluating

A. liquidity. C. profitability.B. marketability. D. solvency.

Financial Leverage45. 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.

90. 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. yieldB. solvency D. quick assets

55. Using financial leverage is a good financial strategy from the viewpoint of stockholders of companies having:A. a high debt ratio C. a steadily declining current ratioB. steady or rising profits D. cyclical highs and lows

46. The ratio that indicates a company’s degree of financial leverage is theA. cash debt coverage ratio. C. free cash flow ratio.B. debt to total assets. D. times-interest earned ratio.

73. Interest expense creates magnification of earnings through financial leverage because:A. while earnings available to pay interest rise, earnings to residual owners rise fasterB. interest accompanies debt financingC. interest costs are cheaper than the required rate of return to equity ownersS. the use of interest causes higher earnings

Measures of solvency34. The set of ratios that is most useful in evaluating solvency is

A. debt ratio, current ratio, and times interest earnedB. debt ratio, times interest earned, and return on assetsC. debt ratio, times interest earned, and quick ratioD. debt ratio, times interest earned, and cash flow to debt


49. Which of the following ratios is most relevant to evaluating solvency?A. Return on assets C. Days’ purchases in accounts payableB. Debt ratio D. Dividend yield

Fixed assets to long-term liabilities44. 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 liabilitiesB. ratio of net sales to assetsC. number of days' sales in receivablesD. rate earned on stockholders' equity

Debt ratio59. The debt ratio indicates:

A. a comparison of liabilities with total assetsB. the ability of the firm to pay its current obligationsC. the efficiency of the use of total assetsD. the magnification of earnings caused by leverage

78. The debt to total assets ratio measuresA. 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 ratio60. 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 earned74. A times interest earned ratio of 0.90 to 1 means that

A. the firm will default on its interest paymentB. net income is less than the interest expenseC. the cash flow is less than the net incomeD. the cash flow exceeds the net income

Fixed charge coverage61. A fixed charge coverage:

A. is a balance sheet indication of debt carrying abilityB. is an income statement indication of debt carrying abilityC. frequently includes research and developmentD. computation is standard from firm to firm

Off-balance sheet liabilities62. If a firm has substantial capital or financing leases disclosed in the notes but not

capitalized in the financial statements, then theA. times interest earned ratio will be overstated, based upon the financial statementsB. debt ratio will be understatedC. working capital will be understatedD. fixed charge ratio will be overstated, based upon the financial statements

Profitability ratiosInterested parties39. 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.

52. Stockholders are most interested in evaluatingA. liquidity. C. profitability.B. solvency. D. marketability.

Performance measures48. 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 ratioB. ROA, ROE, and dividend yield D. ROA, ROE, and cash flow to debt

Earnings per share82. Which of the following ratios appears most frequently in annual reports?

A. Earnings per Share C. Profit MarginB. Return on Equity D. Debt/Equity

Return on assets


64. Return on assetsA. can be determined by looking at a balance sheetB. should be smaller than return on salesC. can be affected by the company’s choice of a depreciation methodD. should be larger than return on equity

Return on investments72. Return on investment measures:

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

Market test ratiosPrice-earnings ratio56. The price/earnings ratio

A. measures the past earning ability of the firmB. is a gauge of future earning power as seen by investorsC. relates price to dividendsD. relates

58. Which of the following ratios usually reflects investors opinions of the future prospects for the firm?A. dividend yield C. book value per shareB. price/earnings ratio D. earnings per share

Dividend yield57. Which of the following ratios represents dividends per common share in relation to market price per

common share?A. dividend payout C. price/earningsB. dividend yield D. book value per share

Financial Statement AnalysisAccounts Receivable26. 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.

31. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover

to:A. decrease C. either increase or decreaseB. remain the same D. increase

Inventories32. Which of the following would best indicate that the firm is carrying excess inventory?

A. a decline in the current ratioB. stable current ratio with declining quick ratiosC. a decline in days' sales in inventoryD. a rise in total asset turnover

89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. What might you assume about Tri-C?A. Its cash balance is too low. C. Its current liabilities are too low.B. Its cost of goods sold is too low. D. Its average inventory is too high.

Current ratio33. 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 creditB. Sell marketable securities at costC. Pay off accounts payable with cashD. Pay off a portion of long-term debt with cash

Fixed asset turnover ratio68. 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 turnover81. 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. DebtB. Fixed assets D. Inventory

Profitability analysis


84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of P2,500,000. Which of the following best compares the profitability of Denver and Oakland?A. Oakland Enterprises is 25% more profitable than Denver Dynamics.B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't be

quantified.C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics.D. Further information is needed for a reasonable comparison.

Debt ratio86. 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 thatA. Company A has higher net income than Company BB. Company A has a lower return on assets than company BC. Company A is more risky than Company B.D. Company A has a lower debt ratio than company B

Sensitivity AnalysisCurrent ratio40. 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.

43. Recently the M&M Company has been having problems. As a result, its financial situation has deteriorated. M&M approached the First National Bank for a badly needed loan, but the loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank would even consider granting the credit. Which of the following actions would do the most to improve the ratio in the short run?A. Using some cash to pay off some current liabilities.B. Collecting some of the current accounts receivable.C. Paying off some long-term debt.D. Purchasing additional inventory on credit (accounts payable).

87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before

borrowing P60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Tyner Company's current ratio?A. The ratio remained unchanged.B. The change in the current ratio cannot be determined.C. The ratio decreased.D. The ratio increased.

88. 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 ratio38. 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 DecreaseCollection of receivable No effect Increase No effect Decrease

Profit margin70. Which of the following would most likely cause a rise in net profit margin?

A. increased sales C. decreased operating expensesB. decreased preferred dividends D. increased cost of sales

Return on assets67. Return on assets cannot fall under which of the following circumstances?

A. B. C. D.Net profit margin Decline Rise Rise DeclineTotal asset turnover Rise Decline Rise Decline

Debt ratio83. 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 earned85. 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 Analysis71. 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-endB. increased turnover of operating assets D. a stock split

80. A firm with a lower net profit margin can improve its return on total assets byA. increasing its debt ratio C. increasing its total asset turnoverB. decreasing its fixed assets turnover D. decreasing its total asset turnover

PROBLEMS:Horizontal analysisi. 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 P3,500,000B. 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 percentageB. can be stated as 100% increase D. can be stated as 200% increase

Liquidity ratiosiii. The following financial data have been taken from the records of Ratio Company:

Accounts receivable P200,000Accounts payable 80,000Bonds payable, due in 10 years 500,000Cash 100,000

Interest payable, due in three months 25,000Inventory 440,000Land 800,000Notes 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 DecreaseAcid-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:

Accounts payable P145,000Accounts receivable 110,000Accrued liabilities 4,000Cash 80,000Income tax payable 10,000Inventory 140,000Marketable securities 250,000Notes payable, short-term 85,000Prepaid expenses 15,000

iv. The amount of working capital for the company is:A. P351,000 C. P211,000B. P361,000 D. P336,000

v. The company’s current ratio as of the balance sheet date is:A. 2.67:1 C. 2.02:1B. 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. 2.02:1B. 2.40:1 D. 1.76:1

Activity ratiosReceivables turnovervii. 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 P1,500,000Net cash sales 240,000Accounts receivable at beginning of year 200,000Accounts receivable at end of year 400,000

Milward’s accounts receivable turnover isA. 3.75 times C. 5.00 timesB. 4.35 times D. 5.80 times

Days receivableix. 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 360-day year, what is the average collection period of the receivables?A. 30 days C. 73 daysB. 65 days D. 36 days

Cash collectionx. 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. P34,000B. P35,000 D. P25,000

Inventory turnoverxi. 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. 5.3B. 6.0 D. 5.0

xii. Selected information from the accounting records of Petals Company is as follows:Net sales for 2007 P900,000Cost of goods sold for 2007 600,000Inventory at December 31, 2006 180,000

Inventory at December 31, 2007 156,000Petals’ inventory turnover for 2007 isA. 5.77 times C. 3.67 timesB. 3.85 times D. 3.57 times

xiii. The Moss Company presents the following data for 2007.Net Sales, 2007 P3,007,124Net Sales, 2006 P 930,247Cost of Goods Sold, 2007 P2,000,326Cost of Goods Sold, 2007 P1,000,120Inventory, beginning of 2007 P 341,169Inventory, end of 2007 P 376,526

The merchandise inventory turnover for 2007 is:A. 5.6 C. 7.5B. 15.6 D. 7.7

xiv. Based on the following data for the current year, what is the inventory turnover?Net sales on account during year P 500,000Cost of merchandise sold during year 330,000Accounts receivable, beginning of year 45,000Accounts receivable, end of year 35,000Inventory, beginning of year 90,000Inventory, end of year 110,000

A. 3.3 C. 3.7B. 8.3 D. 3.0

Days inventoryxv. Selected information from the accounting records of Eternity Manufacturing Company

follows:Net sales P3,600,000Cost of goods sold 2,400,000Inventories at January 1 672,000Inventories at December 31 576,000

What is the number of days’ sales in average inventories for the year?A. 102.2 C. 87.6B. 94.9 D. 68.1

Turnover ratiosAsset turnover


Assetxvi. 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 ratiosDebt ratioxvii. Jordan Manufacturing reports the following capital structure:

Current liabilities P100,000Long-term debt 400,000Deferred income taxes 10,000Preferred stock 80,000Common stock 100,000Premium on common stock 180,000Retained earnings 170,000

What is the debt ratio?A. 0.48 C. 0.93B. 0.49 D. 0.96

Times interest earnedxviii. House of Fashion Company had the following financial statistics for 2006:

Long-term debt (average rate of interest is 8%) P400,000Interest expense 35,000Net income 48,000Income tax 46,000Operating income 107,000

What is the times interest earned for 2006?A. 11.4 times C. 3.1 timesB. 3.3 times D. 3.7 times

xix. Brava Company reported the following on its income statement:Income before taxes P400,000Income tax expense 100,000Net income P300,000

An analysis of the income statement revealed that interest expense was P100,000. Brava Company’s times interest earned (TIE) wasA. 5 times C. 3.5 timesB. 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) P1,000,000Preferred 5% stock, P100 par (no change during year) 300,000Common stock, P50 par (no change during year) 2,000,000Income before income tax for year 350,000Income tax for year 80,000Common dividends paid 50,000Preferred 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. 4.5B. 4.4 D. 3.5

xxi. The following data were abstracted from the records of Johnson Corporation for the year:Sales P1,800,000Bond interest expense 60,000Income taxes 300,000Net income 400,000

How many times was bond interest earned?A. 7.67 C. 12.67B. 11.67 D. 13.67

Net incomexxii. 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. P54,000B. P42,000 D. P66,000

Profitability RatiosReturn on Common Equityxxiii. Selected information for Ivano Company as of December 31 is as follows:

2006 2007Preferred stock, 8%, par P100, nonconvertible,

noncumulativeP250,000 P250,000

Common stock 600,000 800,000Retained earnings 150,000 370,000Dividends paid on preferred stock for the year 20,000 20,000


Net income for the year 120,000 240,000Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for 2007 isA. 17% C. 21%B. 19% D. 23%

Dividend yieldxxiv. The following information is available for Duncan Co.:

2006Dividends per share of common stock P 1.40Market 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.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 RatiosMarket/Book value ratioPrice per sharexxv. 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. P85.70B. P30.00 D. P105.00

P/E ratioxxvi. 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 1B. 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 P4,500,000Net income year ended 12/31/07 1,200,000Dividends on preferred stock year ended 12/31/07 300,000Market price per share of common stock at 12/31/07 144

The price-earnings ratio on common stock at December 31, 2007, wasA. 10 to 1 C. 14 to 1B. 12 to 1 D. 16 to 1

Payout ratioxxviii. Selected financial data of Alexander Corporation for the year ended December 31, 2007,

is presented below:Operating income P900,000Interest expense (100,000)Income before income taxes 800,000Income tax (320,000)Net income 480,000Preferred 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 percentB. 66.7 percent D. 71.4 percent

P/E ratio & Payout ratioUse 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 isA. 3.8 times C. 18.8 timesB. 15 times D. 6 times

xxx. Terry Corporation’s payout ratio for 2007 isA. P4 per share C. 20.0 percent


B. 12.5 percent D. 25.0 percent

DuPont ModelDebt ratioxxxi. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset

turnover remain unchanged at 8% and 1.25 respectively, by how much must the total debt ratio increase to achieve 20% ROE?A. Total debt ratio must increase by .5B. Total debt ratio must increase by 5C. Total debt ratio must increase by 5%D. Total debt ratio must increase by 50%

xxxii. Assume you are given the following relationships for the Orange Company:Sales/total assets 1.5XReturn on assets (ROA) 3%Return on equity (ROE) 5%

The Orange Company’s debt ratio isA. 40% C. 35%B. 60% D. 65%

Leverage RatioDegree of financial leveragexxxiii. A summarized income statement for Leveraged Inc. is presented below.

Sales P1,000,000Cost of Sales 600,000 Gross Profit P 400,000Operating Expenses 250,000 Operating Income P 150,000Interest Expense 30,000 Earnings Before Tax P 120,000Income 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 ÷ P400,000B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000

Other RatiosBook value per sharexxxiv. 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 P5,000,000Common stock, par, P5 per share; issued and outstanding, 400,000 shares 2,000,000Retained 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 wasA. P5.50 C. P6.75B. P6.25 D. P7.50

xxxv. The following data were gathered from the annual report of Desk Products.Market price per share P30.00Number of common shares 10,000Preferred stock, 5% P100 par P10,000Common equity P140,000

The book value per share is:A. P30.00 C. P14.00B. P15.00 D. P13.75

Integrated ratiosLiquidity & activity ratiosInventoryxxxvi. The current assets of Mayon Enterprise consists of cash, accounts receivable, and

inventory. The following information is available:Credit sales 75% of total salesInventory turnover 5 timesWorking capital P1,120,000Current ratio 2.00 to 1Quick ratio 1.25 to 1Average Collection period 42 daysWorking days 360

The estimated inventory amount is:A. 840,000 C. 720,000B. 600,000 D. 550,000

xxxvii. The following data were obtained from the records of Salacot Company:Current ratio (at year end) 1.5 to 1Inventory turnover based on sales and ending inventory 15 times


Inventory turnover based on cost of goods sold and ending inventory 10.5 timesGross margin for 2007 P360,000

What was Salacot Company’s December 31, 2007 balance in the Inventory account?A. P120,000 C. P 80,000B. P 54,000 D. P 95,000

Net salesxxxviii.Selected data from Mildred Company’s year-end financial statements are presented below. The

difference between average and ending inventory is immaterial.Current ratio 2.0Quick ratio 1.5Current liabilities P120,000Inventory turnover (based on cost of sales) 8 timesGross profit margin 40%

Mildred’s net sales for the year wereA. P 800,000 C. P 480,000B. P 672,000 D. P1,200,000

Gross marginxxxix. Selected information from the accounting records of the Blackwood Co. is as follows:

Net A/R at December 31, 2006 P 900,000Net A/R at December 31, 2007 P1,000,000Accounts receivable turnover 5 to 1Inventories at December 31, 2006 P1,100,000Inventories at December 31, 2007 P1,200,000Inventory turnover 4 to 1What was the gross margin for 2007?

A. P150,000 C. P300,000B. P200,000 D. P400,000

Market Test RatioDividend yieldxl. 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 isA. 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 P1,250,000

Interest expense 250,000Preferred dividends 200,000Payout ratio 40 percentShares outstanding throughout 2006 Preferred 20,000 Common 25,000Income tax rate 40 percentPrice earnings ratio 5 times

The dividend yield ratio isA. 0.50 C. 0.40B. 0.12 D. 0.08

Comprehensivexlii. 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 P560,000Total investments 60,000 40,000Total property, plant, and equipment 900,000 700,000Total current liabilities 150,000 80,000Total long-term liabilities 350,000 250,000Preferred 9% stock, P100 par 100,000 100,000Common stock, P10 par 600,000 600,000Paid-in capital in excess of par-common stock 60,000 60,000Retained 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 percentB. 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 percentB. 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. P1.77B. 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. 12.4B. 12.1 D. 15.9

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Documents

6 Financial Statement Analysis