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Mas Handout 1
Mas Handout 1
I. Vertical analysis which shows the relationships of the items in the same
year or it is the process of comparing figures in the financial statements
of a single period. It is also referred to as “static measure”. It
includes:
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
Financial Ratios
TESTS OF LIQUIDITY (Liquidity refers to the company’s ability to pay its current
liabilities as they fall due.)
It is a measure of adequacy of
Current Ratio working capital. It is the primary
Current Assets
(Banker’s Ratio) test of solvency to meet current
Current Liabilities
(Working Capital Ratio) obligations from current assets.
Rule of Thumb 2:1.
Quick Assets(Cash, It measures the number of times
Quick Ratio Short-term investments that the current liabilities could
(Acid Test Ratio) & A/R, net) be paid with the available cash and
Current Liabilities near-cash assets.
It is the time required to complete
one collection cycle from the time
Accounts Receivables Net (Credit) Sales
receivables are recorded, then
Turnover (RTO)* Average Receivables
collected, to the time new
receivables are recorded again
It indicates the average number of
Average Age of 360 days days during which the company must
Receivables Receivables Turnover wait before receivables are
collected.
Cost of Goods Sold It measures the number of times
Inventory Turnover
Average Merchandise that the inventory is replaced
(ITO)*
Inventory during the period
It indicates the average number of
Average Age Of 360 days days during which the company must
Inventory Inventory Turnover wait before the inventories are
sold.
Raw Materials Cost of Materials Used
Turnover (RMITO)* Average Raw Material Inventory
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
TEST OF PROFITABILITY
Measures profit generated after
Gross Profit
Gross Profit Margin consideration of cost of goods
Net Sales
sold.
Operating Profit Measures profit generated after
Operating Profit Margin
Net Sales consideration of operating costs.
Measures net profit generated
Sales Margin/Profit
Net Income after consideration of all
Margin/Rate of Return
Net Sales expenses relative to net
on Net Sales (RONS)
sales/income by owners
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
MARKET TESTS
Price-Earnings Ratio Market Price Per Share It indicates the number of pesos
(P/E) Earnings Per Share required to buy P1 of earnings
Measures the rate of return in
Dividend Per Share
Dividend Yield the investor’s common stock
Market Price Per Share
investments.
Common Dividend Per
It indicates the proportion of
Dividend Pay-Out ________Share_______
earnings distributed as dividends
Earnings Per Share
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
Problems
I – Horizontal Analysis – Increase – Decrease method (Financial
Statement Analysis using Comparative Statements)
Balance Sheet
Change
Peso %
2005 2006
Assets
Cash and equivalents 14,000 16,000 2,000 14.29%
Receivables 28,800 55,600 26,800 93.06%
Inventories 54,000 85,600 31,600 58.52%
Prepayments and others 4,800 7,400 2,600 54.17%
Total current assets 101,600 164,600 63,000 62.01%
Property, plant & equipment - net
of dep. 30,200 73,400 43,200 143.05%
Total assets 131,800 238,000 106,200 80.58%
Liabilities and Equity
Notes payable to banks 10,000 54,000 44,000 440.00%
Accounts payable 31,600 55,400 23,800 73.32%
Accrued liabilities 4,200 6,800 2,600 61.90%
Income taxes payable 5,800 7,000 1,200 20.69%
Total current liabilities 51,600 123,200 71,600 138.76%
Share capital 44,600 44,600 0 0.00%
Retained earnings 35,600 70,200 34,600 97.19%
Total equity 80,200 114,800 34,600 43.14%
Total liabilities and equity 131,800 238,000 106,200 80.58%
Income Statement Change
Peso %
2005 2006
Net sales 266,400 424,000 157,600 59.16%
Cost of goods sold 191,400 314,600 123,200 64.37%
Gross profit 75,000 109,400 34,400 45.87%
Selling, general and administrative
expenses 35,500 58,400 22,900 64.51%
Income before income taxes 39,500 51,000 11,500 29.11%
Income taxes 12,300 16,400 4,100 33.33%
Net income 27,200 34,600 7,400 27.21%
Cash P 64 P 72 P84 P 88 P 80
Accounts receivable 560 496 432 416 400
Inventory 896 880 816 864 800
Total current assets P1,520 P1,448 P1,332 P1,368 P1,280
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
Assets: Cash declined from Year 3 through Year 5. This may have been
due to the growth in both inventories and accounts receivable.
In particular, the accounts receivable grew far faster than
sales in Year 5. The decline in cash may reflect delays in
collecting receivables. This is a matter for management to
investigate further.
In Year 2, overall profitability declined for many reasons. Cost of goods sold,
marketing expense, administrative expense, and interest expense all increased
as a percentage of sales. A partial explanation for these increases could be
that Company A has a large element of fixed costs in its cost structure. Thus,
costs don’t decline very much when sales volume declines. The only two expenses
to decline as a percentage of sales were R&D and income tax (because of lower
income). The decline in R&D expense is symptomatic of a company that is trying
to maintain profitability in the short run. Of course, if R&D dries up in the
long run, the company will slowly lose its advantage in the market place.
Year 3 saw a reversal of all of the bad trends in Year 2. Cost of goods sold,
marketing expense, administrative expense, and interest expense all decreased
as a percentage of sales. R&D expense increased as a percentage of sales,
perhaps to make up for the temporary decline in Year 2.
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
In Year 3, total assets were 55.8% of sales, compared to 82.2% of sales in Year
2 and 56.0% of sales in Year 1. This indicates a substantial increase in
efficiency compared to Year 2 because fewer assets are needed for each dollar
of sales. In Year 3, each asset was used more efficiently than it was in Year
2. Cash, accounts receivable, inventory, and net property, plant, and equipment
all decreased as a percentage of sales.
V- Financial Ratios
The following financial statements for ABC Company are given below:
Balance Sheet
December 31, 2012
Current Assets: Liabilities
Cash P 15,000 Current Liabilities P 200,000
Marketable securities 6,000 Bonds payable, 10% ___300,000
Accounts rec’ble, net 160,000 Total Liabilities P 500,000
Merchandise inventory 300,000 Equity:
Prepaid expenses _____9,000 Ordinary Share,P5 par P 100,000
Total Current Assets P 490,000 Retained earnings ___700,000
Property and eqpt., net ___810,000 Total Equity P 800,000
Total Assets P1,300,000 Total Liab. and Equity P1,300,000
Income Statement
For the year Ended, December 31, 2012
Sales P2,100,000
Less: Cost of goods sold 1,260,000
Gross margin P 840,000
Less: Operating expenses (including
depreciation & amortization of
P60,000) ___660,000
Net Operating Income P 180,000
Less: Interest expenses ____30,000
Net income before taxes P 150,000
Less: Income taxes ____45,000
Net income P 105,000
The following balances at beginning of the year are as follows: Accounts receivables
(net), P140,000; Inventory, P260,000, Property and equipment (net), P830,000. All sales
are on account. Dividends paid for the year amounted to P63,000 and the year-end (market)
price per share amounted to P63.(Use 365 days)
Required:
1. Working Capital 13. Debt ratio
2. Current ratio 14. Equity ratio
2. Acid-test (quick) ratio 15. Debt to equity ratio
3. Working capital to Total Assets 16. Book value per share
4. Accounts receivable turnover 17. Times interest earned
5. Average Collection period or 18. Gross profit margin
Number of days’ sales in receivables 19. Operating profit margin
(average and end of the year balances) 20. Sales margin (or rate of
6. Inventory turnover return on net sales or
7. Number of days’ sales in inventory profit margin)
(Days supply in inventory – in terms 21. Return on assets
of average and end of the year balances) 22. Return on equity
8. Operating cycle 23. Return on fixed assets
9. Payables Turnover 24. Return on current assets
10. Current Assets Turnover (Based on Net 25. Price-earnings ratio
Sales & Cash, cost and expenses) 26. Dividend per share
11. Fixed Assets turnover 27. Dividend yield
12. Assets Turnover 28. Dividend payout
29. Book-to-market ratio
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
The following are data taken from Clayburgh Corporation’s records for the years
ended December 31, 2012 and 2011:
2012 2011
Finished goods inventory P 60,000 P 40,000
Goods in process inventory 60,000 65,000
Raw materials inventory 60,000 40,000
Sales 400,000 340,000
Cost of goods sold 225,000 230,000
Cost of goods manufactured 260,000 250,000
Raw materials used in production 150,000 130,000
The December 31, 2009, balance sheet of Cooper’s Inc. and additional information
follow. These are the only accounts on Cooper’s balance sheet.
Assets Liabilities
Cash P 25,000 Accounts payable P ?
Accounts rec’ble, net ? Inc. taxes pay. (curr) 25,000
Inventory ? Long-term debt ?
Prop., plant & eqpt, net 294,000 Common stock 300,000
_________ Retained earnings ________?
P 432,000 P ?
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
IX
Lambda, Inc. presents only the following figures from its balance sheet. You
are to calculate the amounts represented by question marks (?) from the
additional information given:
Assets
Cash P 37,500
Accounts Receivable (net) ?
Inventory ?
Plant and Equipment (net) 441,000
P 648,000
Total stockholders’ equity on December 31, 2012 was P900,000. Gross margin for
2011 amounted to P600,000. Beginning balance of merchandise inventory was
P200,000. The company’s long-term liabilities consisted of bonds payable with
interest at 15%. You decided to reconstruct the company’s financial statements
based on the limited information given to serve as basis for further analysis.
The following ratios and other data pertain to the financial statements of the
Boolacan Company for the year ended December 31, 2009:
Current ratio 1.75 to 1
Acid-test ratio 1.27 to 1
Working capital P33,000
Fixed assets to equity ratio .625 to 1
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
Reconstruct the balance sheet and income statement for the year 2009.
XIII
1. If net credit sales for the year is P15,000,000 and average accounts
receivable is P3,000,000, how many days of sales are in accounts
receivable on the average? What is the receivables turnover?
4. What is the return on sales if the asset turnover is 2.6 and 13 percent
is earned on assets?
5. Sales for the year were P28,000,000 and the average asset investment was
P8,000,000. Determine the asset turnover.
6. Assets are turned over 0.8 times in earning 15 percent on the sales pesos.
What is the return on assets?
8. The return on assets was 16 percent, and 8 percent was earned on net
sales. What was the asset turnover?
9. The return on assets has been computed at 14 percent. The net income was
P840,000 and the asset turnover was 2. Determine the amount of sales and
return on sales.
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
11. The return on sales has remained at 6 percent for the past two years.
The asset turnover in the first year was 2.4 and declined to 1.8 in the
second year. Compute the return on assets for each of the two years.
12. Net sales for the year were P9,600,000. Assets turned over 1.2 times
during the year. Cost of goods sold and operating expenses, including
income tax, amounted to P8,880,000. Compute the return on net sales and
on total assets.
13. The per share market price of Far East shares on January 1, 2012 was P60
and on December 31, 2012 was P72. Net income for 2012 was P48,000.
Dividends to the preference shareholders for the year totaled P12,000,
and dividends of P2.50 per share were paid on the 6,000 ordinary shares
outstanding during the year. The price-earnings ratio for Far East at
year end was:
15. Karen Company’s net accounts receivable were P430,000 on December 31,
2012 and P480,000 on December 31, 2013. Cash sales during 2013 were
P175,000. The accounts receivable turnover for 2013 was 5. Karen Company’s
total sales for 2013 were:
16. The average stockholders’ equity for Bettina Company for 2012 was
P2,000,000. Included in this figure is P200,000 par value of 8% preference
share, which remained unchanged during the year. If the return on ordinary
shareholders’ equity was 12.5% during 2012, net income was:
XIV – Relationships
3. What would be the company’s equity-debt ratio if: current liabilities are
P362,000; long-term liabilities – P448,000’; common stock paid-in
P800,000; and retained earnings – P658,000.
Effects on.
Current Acid- Debt
Ratio Test Ratio
Ratio
Example: An account payable is paid. + - -
1. Bought inventory for cash. _____ _____ _____
2. A sale is made on account; cost of sales is
less than selling price _____ _____ _____
3. Issued long-term bonds for cash. _____ _____ _____
4. Sold land for cash at its book value. _____ _____ _____
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
Indicate the effects of each of the following transactions on the company’s (a)
ROS, (b) ROA, and (c) EPS. There are three possible answers: (+) increase, (-)
decrease, and (0) no effect. Before each transaction takes place, the ratios
are as follows: (a) ROS, 10%; (b) ROA, 5%; (c) EPS, $0.25.
Effects on.
(a) (b) (c)
ROS ROA EPS
1. Sell a plant asset for cash, at twice the _____ _____ _____
asset’s book value
2. Declare and issue a stock dividend. _____ _____ _____
3. Purchase inventory on account. _____ _____ _____
4. Purchase treasury stock for cash. _____ _____ _____
5. Acquire land by issuing common stock. _____ _____ _____
Z-Way Corporation had ROS of 5% and sales of P24 million. Interest expense is
P0.3 million; total assets are P16 million; the debt ratio is 40%. There is
no preferred stock. Ignore taxes.
Required: Calculate the ROE using the three-factor expression or the earning-
power model.
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ALDERSGATE COLLEGE
MANAGEMENT ADVISORY SERVICES (T 7:30 – 10:30)
XX
Cash Flow Adequacy Ratio – it is a ratio based on cash flow from operations
gives a more direct indication of a company’s ability to generate sufficient
cash to satisfy predictable cash requirements.
The following information available for AAA Corporation (use 365 days):
2012 2011
Net income P 180,000 P 205,000
Depreciation expense 100,000 80,000
(Increase) decrease in noncurrent assets 60,000 (231,500)
Increase (decrease) in current liabilities ( 91,000) 371,000
Cash from operating activities P 249,000 P 424,500
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