Financial Statement Analysis

Dsa dsa fw fsdfsdfgzgvbdfxb 14. Horizontal analysis is a technique for evaluating a series of financial statement data over a
C. Management is interested in the financial structure of the entity. period of time
D. Management is interested in the asset structure of the entity. 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.
Limitations C. to determine which items are in error.
1. A limitation in calculating ratios in financial statement analysis is that D. to determine the amount and/or percentage increase or decrease that has taken place.
A. it requires a calculator.
B. no one other than the fadfgsdfghsfC. profitability analysis Trend analysis
B. solvency analysis D. horizontal analysis 16. Trend analysis allows a firm to compare its performance to:
A. other firms in the industry C. other industries
15. Vertical analysis is a technique that expresses each item in a financial statement B. other time periods within the firm D. none of the above
A. in pesos and centavos.
B. as a percent of the item in the previous year. Risk and return
C. as a percent of a base amount. 29. The present and prospective stockholders are primarily concerned with a firm’
D. starting with the highest value down to the lowest value. A. profitability C. leverage
B. liquidity D. risk and return
17. In performing a vertical analysis, the base for prepaid expenses is
A. total current assets. C. total liabilities. 69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?
B. total assets. D. prepaid expenses in a previous year. A. common stockholders C. preferred shareholders
B. general creditors such as banks D. bondholders
Horizontal analysis
8. The percentage analysis of increases and decreases in individual items in comparative Measures of Risk
financial statements is called: 54. The following groups of ratios primarily measure risk:
A. vertical analysis C. profitability analysis A. liquidity, activity, and common equity C. liquidity, activity, and debt
B. solvency analysis D. horizontal analysis B. liquidity, activity, and profitability D. activity, debt, and profitability

11. Horizontal analysis is also known as Financial ratios

A. linear analysis. C. trend analysis. 7. Ratios are used as tools in financial analysis
B. vertical analysis. D. common size analysis. A. instead of horizontal and vertical analyses.
B. because they can provide information that may not be apparent from inspection of the
13. In which of the following cases may a percentage change be computed? individual components of a particular ratio.
A. The trend of the amounts is decreasing but all amounts are positive. C. because even single ratios by themselves are quite meaningful.
B. There is no amount in the base year. D. because they are prescribed by GAAP.
C. There is a negative amount in the base year and a negative amount in the subsequent
year. 18. In the near term, the important ratios that provide the information critical to the short-run
D. There is a negative amount in the base year and a positive amount in the subsequent operation of the firm are:
year. A. liquidity, activity, and profitability C. liquidity, activity, and equity
B. liquidity, activity, and debt D. activity, debt, and profitability

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 Financial Statement Analysis

37. Which one of the following ratios would not likely be used by a short-term creditor in
75. The ability of a business to pay its debts as they come due and to earn a reasonable amount evaluating whether to sell on credit to a company?
of income is referred to as: A. Current ratio C. Asset turnover
A. solvency and leverage C. solvency and liquidity B. Acid-test ratio D. Receivables turnover
B. solvency and profitability D. solvency and equity
51. Which of the following ratios would be least helpful in appraising the liquidity of current
Liquidity ratios assets?
Interested parties A. Accounts Receivable turnover C. Current Ratio
19. The primary concern of short-term creditors when assessing the strength of a firm is the B. Days’ sales in inventory D. Days’ sales in accounts receivable
entity’s
A. short-term liquidity C. market price of stock 53. Which ratio is most helpful in appraising the liquidity of current assets?
B. profitability D. leverage A. current ratio C. acid-test ratio
B. debt ratio D. accounts receivable turnover
35. Short-term creditors are usually most interested in assessing
A. solvency. C. marketability. Not a measure of liquidity
B. liquidity. D. profitability. 79. 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?
36. The two categories of ratios that should be utilized to asses a firm’s true liquidity are the A. accounts receivable turnover. C. acid test ratio.
A. current and quick ratios C. liquidity and profitability ratios B. asset turnover. D. current ratio.
B. liquidity and debt ratios D. liquidity and activity ratios
Current ratio
47. Which of the following is the most of interest to a firm’s suppliers? 24. Typically, which of the following would be considered to be the most indicative of a firm's short-
A. profitability C. asset utilization term debt paying ability?
B. debt D. liquidity A. working capital C. acid test ratio
B. current ratio D. days’ sales in receivables
Measures of liquidity
21. The ratios that are used to determine a company’s short-term debt paying ability are 22. The current ratio is
A. asset turnover, times interest earned, current ratio, and receivables turnover. A. calculated by dividing current liabilities by current assets.
B. times interest earned, inventory turnover, current ratio, and receivables turnover. B. used to evaluate a company’s liquidity and short-term debt paying ability.
C. times interest earned, acid-test ratio, current ratio, and inventory turnover. C. used to evaluate a company’s solvency and long-term debt paying ability.
D. current ratio, acid-test ratio, receivables turnover, and inventory turnover. D. calculated by subtracting current liabilities from current assets.

20. Which of the following is a measure of the liquidity position of a corporation? 30. Which of the following ratios is rated to be a primary measure of liquidity and considered of
A. earnings per share highest significance rating of the liquidity ratios a bank analyst?
B. inventory turnover A. Debt/Equity
C. current ratio B. Current ratio
D. number of times interest charges earned C. Degree of Financial Leverage
D. Accounts Receivable Turnover in Days

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 Financial Statement Analysis

B. it can be any length as long as the customer continues to buy merchandise.

41. A weakness of the current ratio is C. that it should not greatly exceed the discount period.
A. the difficulty of the calculation. D. that it should not greatly exceed the credit term period.
B. that it does not take into account the composition of the current assets.
C. that it is rarely used by sophisticated analysts. Asset utilization ratios
D. that it can be expressed as a percentage, as a rate, or as a proportion. Performance measures
65. All of the following are asset utilization ratios except:
Acid-test or quick ratio A. average collection period C. receivables turnover
42. A measure of a company’s immediate short-term liquidity is the B. inventory turnover D. return on assets
A. current ratio.
B. current cash debt coverage ratio. Asset turnover
C. cash debt coverage ratio. 63. Asset turnover measures
D. acid-test ratio. A. how often a company replaces its assets.
B. how efficiently a company uses its assets to generate sales.
23. The acid-test or quick ratio C. the portion of the assets that have been financed by creditors.
A. is used to quickly determine a company’s solvency and long-term debt paying ability. D. the overall rate of return on assets.
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 66. Total asset turnover measures the ability of a firm to:
sheet. A. generate profits on sales
D. is the same as the current ratio except it is rounded to the nearest whole percent. B. generate sales through the use of assets
C. cover long-term debt
Not a liquidity ratio D. buy new assets
28. Which one of the following would not be considered a liquidity ratio?
A. Current ratio. C. Quick ratio. 76. A measure of how efficiently a company uses its assets to generate sales is the
B. Inventory turnover. D. Return on assets. A. asset turnover ratio. C. profit margin ratio.
B. cash return on sales ratio. D. return on assets ratio.
Activity ratios
Days receivable & receivable turnover Solvency ratios
Quality of receivables Interested parties
25. Which of the following does not bear on the quality of receivables? 50. Long-term creditors are usually most interested in evaluating
A. shortening the credit terms A. liquidity. C. profitability.
B. lengthening the credit terms B. marketability. D. solvency.
C. lengthening the outstanding period
D. all of the above bear on the quality of receivables Financial Leverage
45. Trading on the equity (leverage) refers to the
Days receivable A. amount of working capital.
27. A general rule to use in assessing the average collection period is B. amount of capital provided by owners.
A. that is should not exceed 30 days. C. use of borrowed money to increase the return to owners.

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 Financial Statement Analysis

D. earnings per share. B. ratio of net sales to assets

C. number of days' sales in receivables
90. The tendency of the rate earned on stockholders' equity to vary disproportionately from the D. rate earned on stockholders' equity
rate earned on total assets is sometimes referred to as:
A. leverage C. yield Debt ratio
B. solvency D. quick assets 59. The debt ratio indicates:
A. a comparison of liabilities with total assets
55. Using financial leverage is a good financial strategy from the viewpoint of stockholders of B. the ability of the firm to pay its current obligations
companies having: C. the efficiency of the use of total assets
A. a high debt ratio C. a steadily declining current ratio D. the magnification of earnings caused by leverage
B. steady or rising profits D. cyclical highs and lows
78. The debt to total assets ratio measures
46. The ratio that indicates a company’s degree of financial leverage is the A. the company’s profitability.
A. cash debt coverage ratio. C. free cash flow ratio. B. whether interest can be paid on debt in the current year.
B. debt to total assets. D. times-interest earned ratio. C. the proportion of interest paid relative to dividends paid.
D. the percentage of the total assets provided by creditor.
73. Interest expense creates magnification of earnings through financial leverage because:
A. while earnings available to pay interest rise, earnings to residual owners rise faster Debt-to-equity ratio
B. interest accompanies debt financing 60. Which of the following statements best compares long-term borrowing capacity ratios?
C. interest costs are cheaper than the required rate of return to equity owners A. The debt/equity ratio is more conservative than the debt ratio.
S. the use of interest causes higher earnings 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.
Measures of solvency D. The debt ratio is more conservative than the debt/equity ratio.
34. The set of ratios that is most useful in evaluating solvency is
A. debt ratio, current ratio, and times interest earned Times interest earned
B. debt ratio, times interest earned, and return on assets 74. A times interest earned ratio of 0.90 to 1 means that
C. debt ratio, times interest earned, and quick ratio A. the firm will default on its interest payment
D. debt ratio, times interest earned, and cash flow to debt B. net income is less than the interest expense
C. the cash flow is less than the net income
49. Which of the following ratios is most relevant to evaluating solvency? D. the cash flow exceeds the net income
A. Return on assets C. Days’ purchases in accounts payable
B. Debt ratio D. Dividend yield Fixed charge coverage
61. A fixed charge coverage:
Fixed assets to long-term liabilities A. is a balance sheet indication of debt carrying ability
44. Which of the following ratios provides a solvency measure that shows the margin of safety of B. is an income statement indication of debt carrying ability
noteholders or bondholders and also gives an indication of the potential ability of the business C. frequently includes research and development
to borrow additional funds on a long-term basis? D. computation is standard from firm to firm
A. ratio of fixed assets to long-term liabilities

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 Financial Statement Analysis

Off-balance sheet liabilities 72. Return on investment measures:

62. If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in A. return to all suppliers of funds C. return to all long-term suppliers of funds
the financial statements, then the B. return to all long-term creditors D. return to stockholders
A. times interest earned ratio will be overstated, based upon the financial statements
B. debt ratio will be understated Market test ratios
C. working capital will be understated Price-earnings ratio
D. fixed charge ratio will be overstated, based upon the financial statements 56. The price/earnings ratio
A. measures the past earning ability of the firm
Profitability ratios B. is a gauge of future earning power as seen by investors
Interested parties C. relates price to dividends
39. The return on assets ratio is affected by the D. relates
A. asset turnover ratio.
B. debt to total assets ratio. 58. Which of the following ratios usually reflects investors opinions of the future prospects for the
C. profit margin ratio. firm?
D. asset turnover and profit margin ratios. A. dividend yield C. book value per share
B. price/earnings ratio D. earnings per share
52. Stockholders are most interested in evaluating
A. liquidity. C. profitability. Dividend yield
B. solvency. D. marketability. 57. Which of the following ratios represents dividends per common share in relation to market
price per common share?
Performance measures A. dividend payout C. price/earnings
48. The set of ratios that are most useful in evaluating profitability is B. dividend yield D. book value per share
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 Financial Statement Analysis
Accounts Receivable
Earnings per share 26. Which of the following reasons should not be considered in order to explain why the
82. Which of the following ratios appears most frequently in annual reports? receivables appear to be abnormally high?
A. Earnings per Share C. Profit Margin A. Sales volume decreases materially late in the year.
B. Return on Equity D. Debt/Equity B. Receivables have collectibility problems and possibly some should have been written off.
C. Material amount of receivables are on the installment basis.
Return on assets D. Sales volume expanded materially late in the year.
64. Return on assets
A. can be determined by looking at a balance sheet 31. An acceleration in the collection of receivables will tend to cause the accounts receivable
B. should be smaller than return on sales turnover to:
C. can be affected by the company’s choice of a depreciation method A. decrease C. either increase or decrease
D. should be larger than return on equity B. remain the same D. increase

Return on investments Inventories

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 Financial Statement Analysis

32. Which of the following would best indicate that the firm is carrying excess inventory? C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics.
A. a decline in the current ratio D. Further information is needed for a reasonable comparison.
B. stable current ratio with declining quick ratios
C. a decline in days' sales in inventory Debt ratio
D. a rise in total asset turnover 86. 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
89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an before interest and taxes and the same total assets. Based on this information we could
average quick ratio, and a low inventory turnover. What might you assume about Tri-C? conclude that
A. Its cash balance is too low. C. Its current liabilities are too low. A. Company A has higher net income than Company B
B. Its cost of goods sold is too low. D. Its average inventory is too high. B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B.
Current ratio D. Company A has a lower debt ratio than company B
33. Which of the following would be most detrimental to a firm's current ratio if that ratio is
currently 2.0? Sensitivity Analysis
A. Buy raw materials on credit Current ratio
B. Sell marketable securities at cost 40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
C. Pay off accounts payable with cash A. improve its collection practices, thereby increasing cash and increasing its current and
D. Pay off a portion of long-term debt with cash quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current
Fixed asset turnover ratio liabilities and increasing the current and quick ratios.
68. Which of the following circumstances will cause sales to fixed assets to be abnormally high? C. decrease current liabilities by utilizing more long-term debt, thereby increasing the
A. A labor-intensive industry. current and quick ratios.
B. The use of units-of-production depreciation. D. increase inventory, thereby increasing current assets and the current and quick ratios.
C. A highly mechanized facility.
D. High direct labor costs from a new union contract. 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
Total asset turnover officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank
81. A firm with a total asset turnover lower than the industry standard and a current ratio which would even consider granting the credit. Which of the following actions would do the most to
meets industry standard might have excessive: improve the ratio in the short run?
A. Accounts receivable C. Debt A. Using some cash to pay off some current liabilities.
B. Fixed assets D. Inventory B. Collecting some of the current accounts receivable.
C. Paying off some long-term debt.
Profitability analysis D. Purchasing additional inventory on credit (accounts payable).
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? 87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before
A. Oakland Enterprises is 25% more profitable than Denver Dynamics. borrowing P60,000 from the bank with a 3-month note payable. What effect did the
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't borrowing transaction have on Tyner Company's current ratio?
be quantified. A. The ratio remained unchanged.

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 Financial Statement Analysis

B. The change in the current ratio cannot be determined.

C. The ratio decreased. Times interest earned
D. The ratio increased. 85. Which of the following will not cause times interest earned to drop? Assume no other changes
than those listed.
88. Which of the following actions will increase a firm's current ratio if it is now less than 1.0? A. A rise in preferred stock dividends.
A. Convert marketable securities to cash. B. A drop in sales with no change in interest expense.
B. Pay accounts payable with cash. C. An increase in interest rates.
C. Buy inventory with short term credit (i.e. accounts payable). D. An increase in bonds payable with no change in operating income.
D. Sell inventory at cost.
DuPont Analysis
Acid-test ratio 71. Which of the following could cause return on assets to decline when net profit margin is
38. If a company has an acid-test ratio of 1.2:1, what respective effects will the increasing?
borrowing of cash by short-term debt and collection of accounts receivable A. sale of investments at year-end C. purchase of a new building at year-end
have on the ratio? B. increased turnover of operating assets D. a stock split
A. B. C. D.
80. A firm with a lower net profit margin can improve its return on total assets by
Short-term borrowing Increase Increase Decrease Decrease
A. increasing its debt ratio C. increasing its total asset turnover
Collection of receivable No effect Increase No effect Decrease
B. decreasing its fixed assets turnover D. decreasing its total asset turnover
Profit margin
70. Which of the following would most likely cause a rise in net profit margin? PROBLEMS:
A. increased sales C. decreased operating expenses Horizontal analysis
B. decreased preferred dividends D. increased cost of sales 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
Return on assets 2008. The respective net income reported by Kline Corporation for 2007 and 2008 are:
67. Return on assets cannot fall under which of the following circumstances? A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000
A. B. C. D. B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
Net profit margin Decline Rise Rise Decline
Total asset turnover Rise Decline Rise Decline .
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:
Debt ratio A. can be stated as 0% C. cannot be stated as a percentage
83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor, B. can be stated as 100% increase D. can be stated as 200% increase
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? Liquidity ratios
A. Jones obviously has too much debt when compared to its competitor. iii
. The following financial data have been taken from the records of Ratio Company:
B. Smith Company's times interest earned should be lower than Jones. Accounts receivable P200,000
C. Smith has five times better long-term borrowing ability than Jones. Accounts payable 80,000
D. Not enough information to determine if any of the answers are correct. Bonds payable, due in 10 years 500,000

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 Financial Statement Analysis

Cash 100,000 P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the
Interest payable, due in three months 25,000 year were P600,000 and P700,000, respectively. The receivables turnover was
Inventory 440,000 A. 7.7 times. C. 9.3 times.
Land 800,000 B. 10.8 times. D. 10.0 times.
Notes payable, due in six months 250,000
viii
What will happen to the ratios below if Ratio Company uses cash to pay 50 percent . Milward Corporation’s books disclosed the following information for the year ended December
of its accounts payable? 31, 2007:
A. B. C. D. Net credit sales P1,500,000
Current ratio Increase Decrease Increase Decrease Net cash sales 240,000
Acid-test ratio Increase Decrease Decrease Increase Accounts receivable at beginning of year 200,000
Accounts receivable at end of year 400,000
Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Milward’s accounts receivable turnover is
Company at the end of the current year: A. 3.75 times C. 5.00 times
Accounts payable P145,000 B. 4.35 times D. 5.80 times
Accounts receivable 110,000
Accrued liabilities 4,000 Days receivable
ix
Cash 80,000 . Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the
Income tax payable 10,000 beginning of the year and a balance of P410,000 at the end of the year. The net credit sales
Inventory 140,000 during the year amounted to P4,000,000. Using 360-day year, what is the average collection
Marketable securities 250,000 period of the receivables?
Notes payable, short-term 85,000 A. 30 days C. 73 days
Prepaid expenses 15,000 B. 65 days D. 36 days

iv
. The amount of working capital for the company is: Cash collection
x
A. P351,000 C. P211,000 . Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in
B. P361,000 D. P336,000 accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of
P4,000. What was the cash collected from customers?
v
. The company’s current ratio as of the balance sheet date is: A. P31,000 C. P34,000
A. 2.67:1 C. 2.02:1 B. P35,000 D. P25,000
B. 2.44:1 D. 1.95:1
Inventory turnover
xi
vi
. The company’s acid-test ratio as of the balance sheet date is: . During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for
A. 1.80:1 C. 2.02:1 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What
B. 2.40:1 D. 1.76:1 was the inventory turnover for 2007?
A. 6.4 C. 5.3
Activity ratios B. 6.0 D. 5.0
Receivables turnover xii
vii
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of . Selected information from the accounting records of Petals Company is as follows:

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 Financial Statement Analysis

Net sales for 2007 P900,000

Cost of goods sold for 2007 600,000 Turnover ratios
Inventory at December 31, 2006 180,000 Asset turnover
Inventory at December 31, 2007 156,000 Asset
Petals’ inventory turnover for 2007 is xvi
. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is
A. 5.77 times C. 3.67 times 3.0. What is the ending total asset balance?
B. 3.85 times D. 3.57 times A. P2,000,000. C. P2,800,000.
B. P1,200,000. D. P1,600,000.
xiii
. The Moss Company presents the following data for 2007.
Net Sales, 2007 P3,007,124 Solvency ratios
Net Sales, 2006 P 930,247 Debt ratio
Cost of Goods Sold, 2007 P2,000,326 xvii
. Jordan Manufacturing reports the following capital structure:
Cost of Goods Sold, 2007 P1,000,120 Current liabilities P100,000
Inventory, beginning of 2007 P  341,169 Long-term debt 400,000
Inventory, end of 2007 P  376,526 Deferred income taxes 10,000
The merchandise inventory turnover for 2007 is: Preferred stock 80,000
A. 5.6 C. 7.5 Common stock 100,000
B. 15.6 D. 7.7 Premium on common stock 180,000
Retained earnings 170,000
xiv
. Based on the following data for the current year, what is the inventory turnover? What is the debt ratio?
Net sales on account during year P 500,000 A. 0.48 C. 0.93
Cost of merchandise sold during year 330,000 B. 0.49 D. 0.96
Accounts receivable, beginning of year 45,000
Accounts receivable, end of year 35,000 Times interest earned
Inventory, beginning of year 90,000 xviii
. House of Fashion Company had the following financial statistics for 2006:
Inventory, end of year 110,000 Long-term debt (average rate of interest is 8%) P400,000
A. 3.3 C. 3.7 Interest expense 35,000
B. 8.3 D. 3.0 Net income 48,000
Income tax 46,000
Days inventory Operating income 107,000
xv
. Selected information from the accounting records of Eternity Manufacturing Company follows: What is the times interest earned for 2006?
Net sales P3,600,000 A. 11.4 times C. 3.1 times
Cost of goods sold 2,400,000 B. 3.3 times D. 3.7 times
Inventories at January 1 672,000
Inventories at December 31 576,000 . Brava Company reported the following on its income statement:
xix

What is the number of days’ sales in average inventories for the year? Income before taxes P400,000
A. 102.2 C. 87.6 Income tax expense 100,000
B. 94.9 D. 68.1 Net income P300,000

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 Financial Statement Analysis

An analysis of the income statement revealed that interest expense was P100,000. Brava noncumulative
Company’s times interest earned (TIE) was Common stock 600,000 800,000
A. 5 times C. 3.5 times Retained earnings 150,000 370,000
B. 4 times D. 3 times Dividends paid on preferred stock for the year 20,000 20,000
Net income for the year 120,000 240,000
xx
. The balance sheet and income statement data for Candle Factory indicate the following: Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for
Bonds payable, 10% (issued 1998 due 2022) P1,000,000 2007 is
Preferred 5% stock, P100 par (no change during year) 300,000 A. 17% C. 21%
Common stock, P50 par (no change during year) 2,000,000 B. 19% D. 23%
Income before income tax for year 350,000
Income tax for year 80,000 Dividend yield
Common dividends paid 50,000 xxiv
. The following information is available for Duncan Co.:
Preferred dividends paid 15,000 2006
Based on the data presented above, what is the number of times bond interest charges were Dividends per share of common stock P 1.40
earned (round to one decimal point)? Market price per share of common stock 17.50
A. 3.7 C. 4.5 Which of the following statements is correct?
B. 4.4 D. 3.5 A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market
price of their stocks.
xxi
. The following data were abstracted from the records of Johnson Corporation for the year: B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns
Sales P1,800,000 on their investments.
Bond interest expense 60,000 C. The dividend yield is 12.5%, which is of interest to bondholders.
Income taxes 300,000 D. The dividend yield is 8.0 times the market price, which is important in solvency analysis.
Net income 400,000
How many times was bond interest earned? Market Test Ratios
A. 7.67 C. 12.67 Market/Book value ratio
B. 11.67 D. 13.67 Price per share
xxv
. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book
Net income value of equity of P3,000,000, and a market/book ratio of 3.5?
xxii
. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for A. P8.57 C. P85.70
the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: B. P30.00 D. P105.00
A. P22,000 C. P54,000
B. P42,000 D. P66,000 P/E ratio
xxvi
. Orchard Company’s capital stock at December 31 consisted of the following:
Profitability Ratios  Common stock, P2 par value; 100,000 shares authorized, issued, and
Return on Common Equity outstanding.
xxiii
. Selected information for Ivano Company as of December 31 is as follows:  10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares
2006 2007 authorized, issued, and outstanding.
Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per

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 Financial Statement Analysis

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 xxix
. Terry Corporation’s price-earnings ratio is
was the price earnings ratio on Orchard’s common stock at December 31? A. 3.8 times C. 18.8 times
A. 6 to 1 C. 10 to 1 B. 15 times D. 6 times
B. 8 to 1 D. 16 to 1
xxx
. Terry Corporation’s payout ratio for 2007 is
xxvii
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common A. P4 per share C. 20.0 percent
stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and B. 12.5 percent D. 25.0 percent
outstanding.
Additional information: DuPont Model
Stockholders’ equity at 12/31/07 P4,500,000 Debt ratio
Net income year ended 12/31/07 1,200,000 xxxi
. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and
Dividends on preferred stock year ended 12/31/07 300,000 asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total
Market price per share of common stock at 12/31/07 144 debt ratio increase to achieve 20% ROE?
The price-earnings ratio on common stock at December 31, 2007, was A. Total debt ratio must increase by .5
A. 10 to 1 C. 14 to 1 B. Total debt ratio must increase by 5
B. 12 to 1 D. 16 to 1 C. Total debt ratio must increase by 5%
D. Total debt ratio must increase by 50%
Payout ratio
xxviii
. Selected financial data of Alexander Corporation for the year ended December 31, 2007, is xxxii
. Assume you are given the following relationships for the Orange Company:
presented below: Sales/total assets 1.5X
Operating income P900,000 Return on assets (ROA) 3%
Interest expense (100,000) Return on equity (ROE) 5%
Income before income taxes 800,000 The Orange Company’s debt ratio is
Income tax (320,000) A. 40% C. 35%
Net income 480,000 B. 60% D. 65%
Preferred stock dividend (200,000)
Net income available to common stockholders 280,000 Leverage Ratio
Common stock dividends were P120,000. The payout ratio is: Degree of financial leverage
A. 42.9 percent C. 25.0 percent xxxiii
. A summarized income statement for Leveraged Inc. is presented below.
B. 66.7 percent D. 71.4 percent Sales P1,000,000
Cost of Sales    600,000
P/E ratio & Payout ratio Gross Profit P 400,000
Use the following information for question Nos. 33 and 34: Operating Expenses    250,000
Terry Corporation had net income of P200,000 and paid dividends to common stockholders of Operating Income P 150,000
P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 Interest Expense     30,000
shares. Terry Corporation’s common stock is selling for P60 per share in the local stock Earnings Before Tax P 120,000
exchange. Income Tax     40,000

577
 Financial Statement Analysis

Net Income P   80,000 Average Collection period 42 days

The degree of financial leverage is: Working days 360
A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000 The estimated inventory amount is:
B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000 A. 840,000 C. 720,000
B. 600,000 D. 550,000
Other Ratios
Book value per share xxxvii
. The following data were obtained from the records of Salacot Company:
xxxiv
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: Current ratio (at year end) 1.5 to 1
6% cumulative preferred stock, P100 par, liquidating value Inventory turnover based on sales and ending inventory 15 times
was P110 per share; issued and outstanding 50,000 shares P5,000,000 Inventory turnover based on cost of goods sold and ending inventory 10.5 times
Common stock, par, P5 per share; issued and Gross margin for 2007 P360,000
outstanding, 400,000 shares 2,000,000 What was Salacot Company’s December 31, 2007 balance in the Inventory account?
Retained earnings 1,000,000 A. P120,000 C. P 80,000
Total P8,000,000 B. P 54,000 D. P 95,000
Dividends on preferred stock have been paid through 2006.
At December 31, 2007, M Corporation’s book value per share was Net sales
A. P5.50 C. P6.75 xxxviii
.Selected data from Mildred Company’s year-end financial statements are presented below.
B. P6.25 D. P7.50 The difference between average and ending inventory is immaterial.
Current ratio 2.0
xxxv
. The following data were gathered from the annual report of Desk Products. Quick ratio 1.5
Market price per share P30.00 Current liabilities P120,000
Number of common shares 10,000 Inventory turnover (based on cost of sales) 8 times
Preferred stock, 5% P100 par P10,000 Gross profit margin 40%
Common equity P140,000 Mildred’s net sales for the year were
The book value per share is: A. P 800,000 C. P 480,000
A. P30.00 C. P14.00 B. P 672,000 D. P1,200,000
B. P15.00 D. P13.75
Gross margin
Integrated ratios xxxix
. Selected information from the accounting records of the Blackwood Co. is as follows:
Liquidity & activity ratios Net A/R at December 31, 2006 P 900,000
Inventory Net A/R at December 31, 2007 P1,000,000
xxxvi
. The current assets of Mayon Enterprise consists of cash, accounts receivable, and Accounts receivable turnover 5 to 1
inventory. The following information is available: Inventories at December 31, 2006 P1,100,000
Credit sales 75% of total sales Inventories at December 31, 2007 P1,200,000
Inventory turnover 5 times Inventory turnover 4 to 1
Working capital P1,120,000 What was the gross margin for 2007?
Current ratio 2.00 to 1 A. P150,000 C. P300,000
Quick ratio 1.25 to 1 B. P200,000 D. P400,000

578
 Financial Statement Analysis

B. 10.1 percent D. 7.4 percent

Market Test Ratio
Dividend yield xliii
. What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)?
xl
. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio A. 10.6 percent C. 12.4 percent
of 75%. The dividend yield is B. 11.2 percent D. 15.6 percent
A. 25.0% C. 7.5%
B. 22.0% D. 10.0% xliv
. What is the earnings per share on common stock for 2007, (round to two decimal places)?
A. P1.92 C. P1.77
xli
. The following were reflected from the records of Salvacion Company: B. P1.89 D. P1.42
Earnings before interest and taxes P1,250,000
Interest expense 250,000 xlv
. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to
Preferred dividends 200,000 one decimal point)?
Payout ratio 40 percent A. 17.0 C. 12.4
Shares outstanding throughout 2006 B. 12.1 D. 15.9
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
The dividend yield ratio is
A. 0.50 C. 0.40
B. 0.12 D. 0.08

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
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

579
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 P100,000
Accounts receivable 200,000
Total liquid assets 300,000
Inventory 440,000
Total current assets P740,000
Current Liabilities:
Accounts payable P 80,000
Notes payable, due in 6 months 250,000
Interest payable 25,000
Total current liabilities P355,000

Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 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:
Accounts payable P145,000
Income tax payable 10,000
Notes payable, short-term 85,000
Accrued liabilities 4,000 244,000

Working Capital 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 P30,000
Add decrease in Accounts Receivable 1,000
Cash collected from sales 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 P168,000
Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times
xiii
. Answer: A
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times
xiv
. Answer: A
Average Inventory: (P90,000 + P110,000) ÷ 2 P100,000
Inventory Turnover: (P330,000 ÷ P100,000) 3.3 times
xv
. Answer: B
Average Inventory: (P672,000 + P576,000) ÷2 P624,000
Inventory Turnover: (P2,400,000 ÷ P624,000) 3.846 times
Inventory Turnover in Days: 365 days ÷ 3.846 94.9 days

Alternative Computation:
Average daily cost of goods sold: = (P2,400,000 ÷ 365) P6,575.34
Turnover in Days: P624,000 ÷ P6,575.34 94.9 days
xvi
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000

Net sales: (P950,000 x 5) P4,750,000

Cost of goods sold (P1,150,000 x 4) 4,600,000
Gross margin P 150,000
xvii
. Answer: B
Current liabilities P 100,000
Long-term debt 400,000
Deferred income tax 10,000
Total Liabilities 510,000
Stockholders’ Equity
Preferred stock P 80,000
Common stock 100,000
Premium on common stock 180,000
Retained earnings 170,000 530,000
Total Assets 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) P 94,000
Add Interest expense 35,000
Income before Interest expense P129,000

TIE: P129,000 ÷ P35,000 3.7 times

xix
. Answer: A
 TIE: Income before interest expense ÷ Interest expense
Income before income tax P400,000
Add back Interest expense 100,000
Income before interest expense P500,000

TIE: P500,000 ÷ P100,000 5 times

xx
. Answer: C
Interest Expense: P1M x 0.1 P100,000
Income before interest expense: P350,000 + P100,000 P450,000
Times interest earned: (P450,000 ÷ P100,000) 4.5 times
xxi
. Answer: C
Net income P400,000
Add: Income taxes P300,000
Interest 60,000 360,000
Income before interest P760,000

TIE: P760,000 ÷ P60,000 12.67 times

xxii
. Answer: B
Earnings before interest expense (P20,000 x 4.5) P90,000
Deduct interest expense 20,000
Income before income tax P70,000
Deduct income tax (P70,000 x 0.4) 28,000
Net income P42,000
xxiii
. Answer: D
Income to Common; (P240,000 – P20,000) P220,000
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000
Return on Common Equity: (P220 ÷ P960) 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) P10,500,000
Market price per share: (P10.5M ÷ 100,000) P105
xxvi
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
xxvii
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
xxviii
. Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common
P120,000 ÷ P280,000 = 42.9%
xxix
. 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
xxx
. Answer: C
Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
xxxi
. Answer: D
ROE: (8% x 1.25) 10.00%
Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
xxxii
. 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 P8,000,000
Deduct:
Liquidation value of Preferred Stock (50,000 s P110) P5,500,000
Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000
Common Equity P2,200,000

Book Value per Share: P2.2M ÷ 400,000 shares 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
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) P840,000

A detailed computation can be made as follows:

Current assets: P1,120,000 x 2 P2,240,000
Liquid assets: P1,120,000 x 1.25 1,400,000
Inventory 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) P 60,000
Cost of goods sold 60,000 x 8 P480,000
Sales (P480,000 ÷ 0.60) P800,000
xxxix
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000

Net sales: (P950,000 x 5) P4,750,000

Cost of goods sold (P1,150,000 x 4) 4,600,000
Gross margin P 150,000
xl
. Answer: C
Dividend per share: 0.75 x P2.20 P1.65
Market price: 10 x 2.20 22.00
Dividend yield: P1.65 ÷ P22.00 = 7.5%
xli
. Answer: D
EBIT 1,250,000
Less interest expense 250,000
Earnings before tax 1,000,000
Less Income tax 40% 400,000
Net income 600,000
Less Preferred dividends 200,000
Earnings to Common Stock 400,000
Earnings per share 400,000/25,000 16.00
Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40

Dividend yield 6.4 ÷ (16 x 5) 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 P115,000
Deduct Preferred Dividends 9,000
Income available to common shares P106,000

EPS: (P106,000 ÷ 60,000) P1.77

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