Financial Statement Analysis

Financial Statement Analysis
10. The percent of property, plant and equipment to total assets is an example of: D. Some industry ratio formulas vary from source to source.
A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis 77. The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose the method used.
15. Vertical analysis is a technique that expresses each item in a financial statement B. may be a problem in ratio analysis even if disclosed.
A. in pesos and centavos. C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
B. as a percent of the item in the previous year. D. is only a problem in ratio analysis with respect to inventory.
C. as a percent of a base amount.
D. starting with the highest value down to the lowest value. Industry Analysis
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is
17. In performing a vertical analysis, the base for prepaid MODULE 10 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.
FINANCIAL STATEMENT ANALYSIS B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm.
THEORIES: C. Relative numbers would be most meaningful for the large firm; absolute numbers would
6. Management is a user of financial analysis. Which of the following comments does not be most meaningful for the small firm.
represent a fair statement as to the management perspective? D. Relative numbers would be most meaningful for both the large and small firm, especially
A. Management is always interested in maximum profitability. for interfirm comparisons.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity. 4. Which of these statements is false?
D. Management is interested in the asset structure of the entity. 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.
Limitations C. The analysis of an entity's financial statements can be more meaningful if the results are
1. A limitation in calculating ratios in financial statement analysis is that compared with industry averages and with results of competitors.
A. it requires a calculator. D. A company comparison should not be made with industry averages if the company does
B. no one other than the management would be interested in them. not clearly fit into any one industry.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company. Common-sized financial statements
9. Which of the following generally is the most useful in analyzing companies of different sizes?
2. Which of the following is not a limitation of financial statement analysis? A. comparative statements C. price-level accounting
A. The cost basis. C. The diversification of firms. B. common-sized financial statements D. profitability index
B. The use of estimates. D. The availability of information.
12. Statements in which all items are expressed only in relative terms (percentages of a base) are
5. Which of the following does not represent a problem with financial analysis? termed:
A. Financial statement analysis is an art; it requires judgment decisions on the part of the A. Vertical statements C. Funds Statements
analyst. B. Horizontal Statements D. Common-Size Statements
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. expenses is
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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
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Horizontal analysis Net Income P 80,000
8. The percentage analysis of increases and decreases in individual items in comparative The degree of financial leverage is:
financial statements is called: A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000
A. vertical analysis C. profitability analysis B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000
B. solvency analysis D. horizontal analysis
Other Ratios
11. Horizontal analysis is also known as Book value per share
A. linear analysis. C. trend analysis. i
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following:
B. vertical analysis. D. common size analysis. 6% cumulative preferred stock, P100 par, liquidating value
was P110 per share; issued and outstanding 50,000 shares P5,000,000
13. In which of the following cases may a percentage change be computed? Common stock, par, P5 per share; issued and
A. The trend of the amounts is decreasing but all amounts are positive. outstanding, 400,000 shares 2,000,000
B. There is no amount in the base year. Retained earnings 1,000,000
C. There is a negative amount in the base year and a negative amount in the subsequent Total P8,000,000
year. Dividends on preferred stock have been paid through 2006.
D. There is a negative amount in the base year and a positive amount in the subsequent At December 31, 2007, M Corporation’s book value per share was
year. A. P5.50 C. P6.75
B. P6.25 D. P7.50
14. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time .
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The following data were gathered from the annual report of Desk Products.
A. that has been arranged from the highest number to the lowest number. Market price per share P30.00
B. that has been arranged from the lowest number to the highest number. Number of common shares 10,000
C. to determine which items are in error. Preferred stock, 5% P100 par P10,000
D. to determine the amount and/or percentage increase or decrease that has taken place. Common equity B. should be smaller than return on sales
C. can be affected by the company’s choice of a depreciation method
Trend analysis D. should be larger than return on equity
16. Trend analysis allows a firm to compare its performance to:
A. other firms in the industry C. other industries Return on investments
B. other time periods within the firm D. none of the above 72. Return on investment measures:
A. return to all suppliers of funds C. return to all long-term suppliers of funds
Risk and return B. return to all long-term creditors D. return to stockholders
29. The present and prospective stockholders are primarily concerned with a firm’
A. profitability C. leverage Market test ratios
B. liquidity D. risk and return Price-earnings ratio
56. The price/earnings ratio
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A. measures the past earning ability of the firm average quick ratio, and a low inventory turnover. What might you assume about Tri-C?
B. is a gauge of future earning power as seen by investors A. Its cash balance is too low. C. Its current liabilities are too low.
C. relates price to dividends B. Its cost of goods sold is too low. D. Its average inventory is too high.
D. relates
Current ratio
58. Which of the following ratios usually reflects investors opinions of the future prospects for the 33. Which of the following would be most detrimental to a firm's current ratio if that ratio is
firm? currently 2.0?
A. dividend yield C. book value per share A. Buy raw materials on credit
B. price/earnings ratio D. earnings per share B. Sell marketable securities at cost
C. Pay off accounts payable with cash
Dividend yield D. Pay off a portion of long-term debt with cash
57. Which of the following ratios represents dividends per common share in relation to market
price per common share? Fixed asset turnover ratio
A. dividend payout C. price/earnings 68. Which of the following circumstances will cause sales to fixed assets to be abnormally high?
B. dividend yield D. book value per share A. A labor-intensive industry.
B. The use of units-of-production depreciation.
Financial Statement Analysis C. A highly mechanized facility.
Accounts Receivable D. High direct labor costs from a new union contract.
26. Which of the following reasons should not be considered in order to explain why the
receivables appear to be abnormally high? Total asset turnover
A. Sales volume decreases materially late in the year. 81. A firm with a total asset turnover lower than the industry standard and a current ratio which
B. Receivables have collectibility problems and possibly some should have been written off. meets industry standard might have excessive:
C. Material amount of receivables are on the installment basis. A. Accounts receivable C. Debt
D. Sales volume expanded materially late in the year. B. Fixed assets D. Inventory
31. An acceleration in the collection of receivables will tend to cause the accounts receivable Profitability analysis
turnover to: 84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
A. decrease C. either increase or decrease P2,500,000. Which of the following best compares the profitability of Denver and Oakland?
B. remain the same D. increase A. Oakland Enterprises is 25% more profitable than Denver Dynamics.
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't
Inventories be quantified.
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
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conclude that C. Buy inventory with short term credit (i.e. accounts payable).
A. Company A has higher net income than Company B D. Sell inventory at cost.
B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B. Acid-test ratio
D. Company A has a lower debt ratio than company B 38. 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
Sensitivity Analysis have on the ratio?
Current ratio A. B. C. D.
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
Short-term borrowing Increase Increase Decrease Decrease
A. improve its collection practices, thereby increasing cash and increasing its current and
Collection of receivable No effect Increase No effect Decrease
quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current
liabilities and increasing the current and quick ratios. Profit margin
70. Which of the following would most likely cause a rise in net profit margin?
C. decrease current liabilities by utilizing more long-term debt, thereby increasing the
current and quick ratios. A. increased sales C. decreased operating expenses
B. decreased preferred dividends D. increased cost of sales
D. increase inventory, thereby increasing current assets and the current and quick ratios.
Return on assets
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 67. Return on assets cannot fall under which of the following circumstances?
officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank A. B. C. D.
would even consider granting the credit. Which of the following actions would do the most to Net profit margin Decline Rise Rise Decline
improve the ratio in the short run? Total asset turnover Rise Decline Rise Decline
A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable. Debt ratio
C. Paying off some long-term debt. 83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor,
D. Purchasing additional inventory on credit (accounts payable). 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?
87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before A. Jones obviously has too much debt when compared to its competitor.
borrowing P60,000 from the bank with a 3-month note payable. What effect did the B. Smith Company's times interest earned should be lower than Jones.
borrowing transaction have on Tyner Company's current ratio? C. Smith has five times better long-term borrowing ability than Jones.
A. The ratio remained unchanged. D. Not enough information to determine if any of the answers are correct.
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.
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D. An increase in bonds payable with no change in operating income. A. B. C. D.

Current ratio Increase Decrease Increase Decrease
DuPont Analysis Acid-test ratio Increase Decrease Decrease Increase
71. Which of the following could cause return on assets to decline when net profit margin is
increasing? Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad
A. sale of investments at year-end C. purchase of a new building at year-end Company at the end of the current year:
B. increased turnover of operating assets D. a stock split Accounts payable P145,000
Accounts receivable 110,000
80. A firm with a lower net profit margin can improve its return on total assets by Accrued liabilities 4,000
A. increasing its debt ratio C. increasing its total asset turnover Cash 80,000
B. decreasing its fixed assets turnover D. decreasing its total asset turnover Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
PROBLEMS: Notes payable, short-term 85,000
Horizontal analysis Prepaid expenses 15,000
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. 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 vi
. The amount of working capital for the company is:
2008. The respective net income reported by Kline Corporation for 2007 and 2008 are: A. P351,000 C. P211,000
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 B. P361,000 D. P336,000
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
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. The company’s current ratio as of the balance sheet date is:
. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in A. 2.67:1 C. 2.02:1
2007. The increase in net income of P300,000: B. 2.44:1 D. 1.95:1
A. can be stated as 0% C. cannot be stated as a percentage
B. can be stated as 100% increase D. can be stated as 200% increase viii
. The company’s acid-test ratio as of the balance sheet date is:
A. 1.80:1 C. 2.02:1
Liquidity ratios B. 2.40:1 D. 1.76:1
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. The following financial data have been taken from the records of Ratio Company:
Accounts receivable P200,000 Activity ratios
Accounts payable 80,000 Receivables turnover
Bonds payable, due in 10 years 500,000 ix
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of
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
What will happen to the ratios below if Ratio Company uses cash to pay 50 percent x
. Milward Corporation’s books disclosed the following information for the year ended December
of its accounts payable? 31, 2007:
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Net credit sales P1,500,000

Net cash sales 240,000 xv
. The Moss Company presents the following data for 2007.
Accounts receivable at beginning of year 200,000 Net Sales, 2007 P3,007,124
Accounts receivable at end of year 400,000 Net Sales, 2006 P 930,247
Milward’s accounts receivable turnover is Cost of Goods Sold, 2007 P2,000,326
A. 3.75 times C. 5.00 times Cost of Goods Sold, 2007 P1,000,120
B. 4.35 times D. 5.80 times Inventory, beginning of 2007 P 341,169
Inventory, end of 2007 P 376,526
Days receivable The merchandise inventory turnover for 2007 is:
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. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the A. 5.6 C. 7.5
beginning of the year and a balance of P410,000 at the end of the year. The net credit sales B. 15.6 D. 7.7
during the year amounted to P4,000,000. Using 360-day year, what is the average collection
period of the receivables? xvi
. Based on the following data for the current year, what is the inventory turnover?
A. 30 days C. 73 days Net sales on account during year P 500,000
B. 65 days D. 36 days Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Cash collection Accounts receivable, end of year 35,000
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. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in Inventory, beginning of year 90,000
accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of Inventory, end of year 110,000
P4,000. What was the cash collected from customers? A. 3.3 C. 3.7
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000
Days inventory
Inventory turnover xvii
. Selected information from the accounting records of Eternity Manufacturing Company follows:
xiii
. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for Net sales P3,600,000
2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What Cost of goods sold 2,400,000
was the inventory turnover for 2007? Inventories at January 1 672,000
A. 6.4 C. 5.3 Inventories at December 31 576,000
B. 6.0 D. 5.0 What is the number of days’ sales in average inventories for the year?
A. 102.2 C. 87.6
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. Selected information from the accounting records of Petals Company is as follows: B. 94.9 D. 68.1
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 xviii
. 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.
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B. P1,200,000. D. P1,600,000. Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
Solvency ratios Income before income tax for year 350,000
Debt ratio Income tax for year 80,000
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. Jordan Manufacturing reports the following capital structure: Common dividends paid 50,000
Current liabilities P100,000 Preferred dividends paid 15,000
Long-term debt 400,000 Based on the data presented above, what is the number of times bond interest charges were
Deferred income taxes 10,000 earned (round to one decimal point)?
Preferred stock 80,000 A. 3.7 C. 4.5
Common stock 100,000 B. 4.4 D. 3.5
Premium on common stock 180,000
Retained earnings 170,000 xxiii
. The following data were abstracted from the records of Johnson Corporation for the year:
What is the debt ratio? Sales P1,800,000
A. 0.48 C. 0.93 Bond interest expense 60,000
B. 0.49 D. 0.96 Income taxes 300,000
Net income 400,000
Times interest earned How many times was bond interest earned?
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. House of Fashion Company had the following financial statistics for 2006: A. 7.67 C. 12.67
Long-term debt (average rate of interest is 8%) P400,000 B. 11.67 D. 13.67
Interest expense 35,000
Net income 48,000 Net income
Income tax 46,000 xxiv
. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for
Operating income 107,000 the year was P20,000, and the company’s tax rate is 40%. The company’s net income is:
What is the times interest earned for 2006? A. P22,000 C. P54,000
A. 11.4 times C. 3.1 times B. P42,000 D. P66,000
B. 3.3 times D. 3.7 times
Profitability Ratios
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. Brava Company reported the following on its income statement: Return on Common Equity
Income before taxes P400,000 xxv
. Selected information for Ivano Company as of December 31 is as follows:
Income tax expense 100,000 2006 2007
Net income P300,000 Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000
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
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Net income for the year 120,000 240,000
. 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
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A. 17% C. 21% stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
B. 19% D. 23% outstanding.
Additional information:
Dividend yield Stockholders’ equity at 12/31/07 P4,500,000
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. The following information is available for Duncan Co.: Net income year ended 12/31/07 1,200,000
2006 Dividends on preferred stock year ended 12/31/07 300,000
Dividends per share of common stock P 1.40 Market price per share of common stock at 12/31/07 144
Market price per share of common stock 17.50 The price-earnings ratio on common stock at December 31, 2007, was
Which of the following statements is correct? A. 10 to 1 C. 14 to 1
A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market B. 12 to 1 D. 16 to 1
price of their stocks.
B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns Payout ratio
on their investments. xxx
. Selected financial data of Alexander Corporation for the year ended December 31, 2007, is
C. The dividend yield is 12.5%, which is of interest to bondholders. presented below:
D. The dividend yield is 8.0 times the market price, which is important in solvency analysis. Operating income P900,000
Interest expense (100,000)
Market Test Ratios Income before income taxes 800,000
Market/Book value ratio Income tax (320,000)
Price per share Net income 480,000
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. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book Preferred stock dividend (200,000)
value of equity of P3,000,000, and a market/book ratio of 3.5? Net income available to common stockholders Total Assets
A. P8.57 C. P85.70 P1,040,000
B. P30.00 D. P105.00
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
P/E ratio
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. Orchard Company’s capital stock at December 31 consisted of the following: . Answer: D
 Common stock, P2 par value; 100,000 shares authorized, issued, and Times interest earned: Earnings before interest ÷ Interest
outstanding. Income before tax (P48,000 + P46,000) P 94,000
 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares Add Interest expense 35,000
authorized, issued, and outstanding. Income before Interest expense P129,000
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. TIE: P129,000 ÷ P35,000 3.7 times
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? . Answer: A
A. 6 to 1 C. 10 to 1 TIE: Income before interest expense ÷ Interest expense
B. 8 to 1 D. 16 to 1 Income before income tax P400,000
Add back Interest expense 100,000
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common
xxix Income before interest expense P500,000
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. Answer: B
TIE: P500,000 ÷ P100,000 5 times EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
. Answer: C
Interest Expense: P1M x 0.1 P100,000 . Answer: D
Income before interest expense: P350,000 + P100,000 P450,000 EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
Times interest earned: (P450,000 ÷ P100,000) 4.5 times P/E Ratio: 144 ÷ 9 16
. Answer: C . Answer: A
Net income P400,000 Payout Ratio: Common Dividends ÷ Income Available to Common
Add: Income taxes P300,000 P120,000 ÷ P280,000 = 42.9%
Interest 60,000 360,000
Income before interest P760,000 . Answer: B
Price-earnings ratio: Market price ÷ EPS
TIE: P760,000 ÷ P60,000 12.67 times EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
. Answer: B P/E Ratio: P60 ÷ P4 15.0X
Earnings before interest expense (P20,000 x 4.5) P90,000
Deduct interest expense 20,000 . Answer: C
Income before income tax P70,000 Payout Ratio: Dividends ÷ Income to Common
Deduct income tax (P70,000 x 0.4) 28,000 P40,000÷ P200,000 = 20.0%
Net income P42,000
. Answer: D
. Answer: D ROE: (8% x 1.25) 10.00%
Income to Common; (P240,000 – P20,000) P220,000 Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000 Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
Return on Common Equity: (P220 ÷ P960) 23 percent Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
. Answer: B . Answer: A
The dividend yield is 8 percent (P1.40 ÷ P17.50) 1 – (0.03 ÷ 0.05) = 40%
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 . Answer: B
dividend Degree of Financial Leverage: Operating Income ÷ Interest Expense
. Answer: D . Answer: A
Market Value of Equity (P3M x 3.5) P10,500,000 Total stockholders’ equity P8,000,000
Market price per share: (P10.5M ÷ 100,000) P105 Deduct:
Liquidation value of Preferred Stock (50,000 s P110) P5,500,000
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Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000

Common Equity P2,200,000 . Answer: C
Dividend per share: 0.75 x P2.20 P1.65
Book Value per Share: P2.2M ÷ 400,000 shares P5.50 Market price: 10 x 2.20 22.00
Dividend yield: P1.65 ÷ P22.00 = 7.5%
. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares . Answer: D
P140,000 ÷ 10,000 shares = P14.00 EBIT 1,250,000
Less interest expense 250,000
. Answer: A Earnings before tax 1,000,000
The inventory amount can be calculated as follows: Less Income tax 40% 400,000
Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1 Net income 600,000
current ratio, the amount of working capital and current liabilities are both P1,120,000. Less Preferred dividends 200,000
Earnings to Common Stock 400,000
Inventory: Current liabilities x (Current ratio – Acid test ratio) Earnings per share 400,000/25,000 16.00
P1,120,000 x (2.0 – 1.25) P840,000 Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40
A detailed computation can be made as follows: Dividend yield 6.4 ÷ (16 x 5) 8.0%
Current assets: P1,120,000 x 2 P2,240,000
Liquid assets: P1,120,000 x 1.25 1,400,000 . Answer: B
Inventory P 840,000 280,000
Common stock dividends were P120,000. The payout ratio is:
. Answer: C A. 42.9 percent C. 25.0 percent
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers) B. 66.7 percent D. 71.4 percent
360,000/(15 – 10.5) = P80,000
P/E ratio & Payout ratio
. Answer: A Use the following information for question Nos. 33 and 34:
Inventory balance (P120,000 x (2.0 – 1.5) P 60,000 Terry Corporation had net income of P200,000 and paid dividends to common stockholders of
Cost of goods sold 60,000 x 8 P480,000 P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000
Sales (P480,000 ÷ 0.60) P800,000 shares. Terry Corporation’s common stock is selling for P60 per share in the local stock
exchange.
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000 xxxi
. Terry Corporation’s price-earnings ratio is
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000 A. 3.8 times C. 18.8 times
B. 15 times D. 6 times
Net sales: (P950,000 x 5) P4,750,000
Cost of goods sold (P1,150,000 x 4) 4,600,000 xxxii
. Terry Corporation’s payout ratio for 2007 is
Gross margin P 150,000 A. P4 per share C. 20.0 percent
576
B. 12.5 percent D. 25.0 percent xxxvi

6% cumulative preferred stock, P100 par, liquidating value
DuPont Model was P110 per share; issued and outstanding 50,000 shares P5,000,000
Debt ratio Common stock, par, P5 per share; issued and
xxxiii
. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and outstanding, 400,000 shares 2,000,000
asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total Retained earnings 1,000,000
debt ratio increase to achieve 20% ROE? Total P8,000,000
A. Total debt ratio must increase by .5 Dividends on preferred stock have been paid through 2006.
B. Total debt ratio must increase by 5 At December 31, 2007, M Corporation’s book value per share was
C. Total debt ratio must increase by 5% A. P5.50 C. P6.75
D. Total debt ratio must increase by 50% B. P6.25 D. P7.50
xxxiv
. Assume you are given the following relationships for the Orange Company: xxxvii
. The following data were gathered from the annual report of Desk Products.
Sales/total assets 1.5X Market price per share P30.00
Return on assets (ROA) 3% Number of common shares 10,000
Return on equity (ROE) 5% Preferred stock, 5% P100 par P10,000
The Orange Company’s debt ratio is Common equity P140,000
A. 40% C. 35% The book value per share is:
B. 60% D. 65% A. P30.00 C. P14.00
B. P15.00 D. P13.75
Leverage Ratio
Degree of financial leverage Integrated ratios
xxxv
. A summarized income statement for Leveraged Inc. is presented below. Liquidity & activity ratios
Sales P1,000,000 Inventory
Cost of Sales 600,000 xxxviii
.The current assets of Mayon Enterprise consists of cash, accounts receivable, and
Gross Profit P 400,000 inventory. The following information is available:
Operating Expenses 250,000 Credit sales 75% of total sales
Operating Income P 150,000 Inventory turnover 5 times
Interest Expense 30,000 Working capital P1,120,000
Earnings Before Tax P 120,000 Current ratio 2.00 to 1
Income Tax 40,000 Quick ratio 1.25 to 1
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 xxxix
. The following data were obtained from the records of Salacot Company:
577
Current ratio (at year end) 1.5 to 1

Inventory turnover based on sales and ending inventory 15 times xliii
. The following were reflected from the records of Salvacion Company:
Inventory turnover based on cost of goods sold and ending inventory 10.5 times Earnings before interest and taxes P1,250,000
Gross margin for 2007 P360,000 Interest expense 250,000
What was Salacot Company’s December 31, 2007 balance in the Inventory account? Preferred dividends 200,000
A. P120,000 C. P 80,000 Payout ratio 40 percent
B. P 54,000 D. P 95,000 Shares outstanding throughout 2006
Preferred 20,000
Net sales Common 25,000
xl
. Selected data from Mildred Company’s year-end financial statements are presented below. Income tax rate 40 percent
The difference between average and ending inventory is immaterial. Price earnings ratio 5 times
Current ratio 2.0 The dividend yield ratio is
Quick ratio 1.5 A. 0.50 C. 0.40
Current liabilities P120,000 B. 0.12 D. 0.08
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40% Comprehensive
Mildred’s net sales for the year were xliv
. The balance sheets of Magdangal Company at the end of each of the first two
A. P 800,000 C. P 480,000 years of operations indicate the following:
B. P 672,000 D. P1,200,000 2007 2006
Total current assets P600,000 P560,000
Gross margin Total investments 60,000 40,000
xli
. Selected information from the accounting records of the Blackwood Co. is as follows: Total property, plant, and equipment 900,000 700,000
Net A/R at December 31, 2006 P 900,000 Total current liabilities 150,000 80,000
Net A/R at December 31, 2007 P1,000,000 Total long-term liabilities 350,000 250,000
Accounts receivable turnover 5 to 1 Preferred 9% stock, P100 par 100,000 100,000
Inventories at December 31, 2006 P1,100,000 Common stock, P10 par 600,000 600,000
Inventories at December 31, 2007 P1,200,000 Paid-in capital in excess of par-common stock 60,000 60,000
Inventory turnover 4 to 1 Retained earnings 300,000 210,000
What was the gross margin for 2007?
Net income is P115,000 and interest expense is P30,000 for 2007.
A. P150,000 C. P300,000
What is the rate earned on total assets for 2007 (round percent to one decimal point)?
B. P200,000 D. P400,000
A. 9.3 percent C. 8.9 percent
B. 10.1 percent D. 7.4 percent
Market Test Ratio
Dividend yield xlv
xlii . What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)?
. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio
of 75%. The dividend yield is
A. 25.0% C. 7.5%
B. 22.0% D. 10.0% xlvi
. What is the earnings per share on common stock for 2007, (round to two decimal places)?
578
A. P1.92 C. P1.77 A. The cost basis. C. The diversification of firms.

B. P1.89 D. P1.42 B. The use of estimates. D. The availability of information.
xlvii
. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to 5. Which of the following does not represent a problem with financial analysis?
one decimal point)? A. Financial statement analysis is an art; it requires judgment decisions on the part of the
A. 17.0 C. 12.4 analyst.
B. 12.1 D. 15.9 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.
10. The percent of property, plant and equipment to total assets is an example of: D. Some industry ratio formulas vary from source to source.
A. vertical analysis C. profitability analysis
B. solvency analysis D. horizontal analysis 77. The use of alternative accounting methods:
A. is not a problem in ratio analysis because the footnotes disclose the method used.
15. Vertical analysis is a technique that expresses each item in a financial statement B. may be a problem in ratio analysis even if disclosed.
A. in pesos and centavos. C. is not a problem in ratio analysis since eventually all methods will lead to the same end.
B. as a percent of the item in the previous year. D. is only a problem in ratio analysis with respect to inventory.
C. as a percent of a base amount.
D. starting with the highest value down to the lowest value. Industry Analysis
3. Suppose you are comparing two firms in the steel industry. One firm is large and the other is
17. In performing a vertical analysis, the base for prepaid MODULE 10 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.
FINANCIAL STATEMENT ANALYSIS B. Absolute numbers would be most meaningful in the large firm; relative numbers would be
most meaningful in the small firm.
THEORIES: C. Relative numbers would be most meaningful for the large firm; absolute numbers would
6. Management is a user of financial analysis. Which of the following comments does not be most meaningful for the small firm.
represent a fair statement as to the management perspective? D. Relative numbers would be most meaningful for both the large and small firm, especially
A. Management is always interested in maximum profitability. for interfirm comparisons.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity. 4. Which of these statements is false?
D. Management is interested in the asset structure of the entity. 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.
Limitations C. The analysis of an entity's financial statements can be more meaningful if the results are
1. A limitation in calculating ratios in financial statement analysis is that compared with industry averages and with results of competitors.
A. it requires a calculator. D. A company comparison should not be made with industry averages if the company does
B. no one other than the management would be interested in them. not clearly fit into any one industry.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company. Common-sized financial statements
9. Which of the following generally is the most useful in analyzing companies of different sizes?
2. Which of the following is not a limitation of financial statement analysis? A. comparative statements C. price-level accounting
579
B. common-sized financial statements D. profitability index A. other firms in the industry C. other industries
B. other time periods within the firm D. none of the above
12. Statements in which all items are expressed only in relative terms (percentages of a base) are
termed: Risk and return
A. Vertical statements C. Funds Statements 29. The present and prospective stockholders are primarily concerned with a firm’
B. Horizontal Statements D. Common-Size Statements A. profitability C. leverage
B. liquidity D. risk and return
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
Ddsadsadsafsdgrg4df964v65s4v65s165v16s5d1v65zs16v16sd
Horizontal analysis Net Income P 80,000
8. The percentage analysis of increases and decreases in individual items in comparative The degree of financial leverage is:
financial statements is called: A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000
A. vertical analysis C. profitability analysis B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000
B. solvency analysis D. horizontal analysis
Other Ratios
11. Horizontal analysis is also known as Book value per share
A. linear analysis. C. trend analysis. xlviii
B. vertical analysis. D. common size analysis. 6% cumulative preferred stock, P100 par, liquidating value
was P110 per share; issued and outstanding 50,000 shares P5,000,000
13. In which of the following cases may a percentage change be computed? Common stock, par, P5 per share; issued and
A. The trend of the amounts is decreasing but all amounts are positive. outstanding, 400,000 shares 2,000,000
B. There is no amount in the base year. Retained earnings 1,000,000
C. There is a negative amount in the base year and a negative amount in the subsequent Total P8,000,000
year. Dividends on preferred stock have been paid through 2006.
D. There is a negative amount in the base year and a positive amount in the subsequent At December 31, 2007, M Corporation’s book value per share was
year. A. P5.50 C. P6.75
B. P6.25 D. P7.50
14. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time . The following data were gathered from the annual report of Desk Products.
xlix
A. that has been arranged from the highest number to the lowest number. Market price per share P30.00
B. that has been arranged from the lowest number to the highest number. Number of common shares 10,000
C. to determine which items are in error. Preferred stock, 5% P100 par P10,000
D. to determine the amount and/or percentage increase or decrease that has taken place. Common equity B. should be smaller than return on sales
C. can be affected by the company’s choice of a depreciation method
Trend analysis D. should be larger than return on equity
16. Trend analysis allows a firm to compare its performance to:
580
Return on investments Inventories

72. Return on investment measures: 32. Which of the following would best indicate that the firm is carrying excess inventory?
A. return to all suppliers of funds C. return to all long-term suppliers of funds A. a decline in the current ratio
B. return to all long-term creditors D. return to stockholders B. stable current ratio with declining quick ratios
C. a decline in days' sales in inventory
Market test ratios D. a rise in total asset turnover
Price-earnings ratio
56. The price/earnings ratio 89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an
A. measures the past earning ability of the firm average quick ratio, and a low inventory turnover. What might you assume about Tri-C?
B. is a gauge of future earning power as seen by investors A. Its cash balance is too low. C. Its current liabilities are too low.
C. relates price to dividends B. Its cost of goods sold is too low. D. Its average inventory is too high.
D. relates
Current ratio
58. Which of the following ratios usually reflects investors opinions of the future prospects for the 33. Which of the following would be most detrimental to a firm's current ratio if that ratio is
firm? currently 2.0?
A. dividend yield C. book value per share A. Buy raw materials on credit
B. price/earnings ratio D. earnings per share B. Sell marketable securities at cost
C. Pay off accounts payable with cash
Dividend yield D. Pay off a portion of long-term debt with cash
57. Which of the following ratios represents dividends per common share in relation to market
price per common share? Fixed asset turnover ratio
A. dividend payout C. price/earnings 68. Which of the following circumstances will cause sales to fixed assets to be abnormally high?
B. dividend yield D. book value per share A. A labor-intensive industry.
B. The use of units-of-production depreciation.
Financial Statement Analysis C. A highly mechanized facility.
Accounts Receivable D. High direct labor costs from a new union contract.
26. Which of the following reasons should not be considered in order to explain why the
receivables appear to be abnormally high? Total asset turnover
A. Sales volume decreases materially late in the year. 81. A firm with a total asset turnover lower than the industry standard and a current ratio which
B. Receivables have collectibility problems and possibly some should have been written off. meets industry standard might have excessive:
C. Material amount of receivables are on the installment basis. A. Accounts receivable C. Debt
D. Sales volume expanded materially late in the year. B. Fixed assets D. Inventory
31. An acceleration in the collection of receivables will tend to cause the accounts receivable Profitability analysis
turnover to: 84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
A. decrease C. either increase or decrease P2,500,000. Which of the following best compares the profitability of Denver and Oakland?
B. remain the same D. increase A. Oakland Enterprises is 25% more profitable than Denver Dynamics.
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't
581
be quantified. A. The ratio remained unchanged.

C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics. B. The change in the current ratio cannot be determined.
D. Further information is needed for a reasonable comparison. C. The ratio decreased.
D. The ratio increased.
Debt ratio
86. Companies A and B are in the same industry and have similar characteristics except that 88. Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
Company A is more leveraged than Company B. Both companies have the same income A. Convert marketable securities to cash.
before interest and taxes and the same total assets. Based on this information we could B. Pay accounts payable with cash.
conclude that C. Buy inventory with short term credit (i.e. accounts payable).
A. Company A has higher net income than Company B D. Sell inventory at cost.
B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B. Acid-test ratio
D. Company A has a lower debt ratio than company B 38. 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
Sensitivity Analysis have on the ratio?
Current ratio A. B. C. D.
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
Short-term borrowing Increase Increase Decrease Decrease
A. improve its collection practices, thereby increasing cash and increasing its current and
Collection of receivable No effect Increase No effect Decrease
quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current
liabilities and increasing the current and quick ratios. Profit margin
70. Which of the following would most likely cause a rise in net profit margin?
C. decrease current liabilities by utilizing more long-term debt, thereby increasing the
current and quick ratios. A. increased sales C. decreased operating expenses
B. decreased preferred dividends D. increased cost of sales
D. increase inventory, thereby increasing current assets and the current and quick ratios.
Return on assets
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 67. Return on assets cannot fall under which of the following circumstances?
officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank A. B. C. D.
would even consider granting the credit. Which of the following actions would do the most to Net profit margin Decline Rise Rise Decline
improve the ratio in the short run? Total asset turnover Rise Decline Rise Decline
A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable. Debt ratio
C. Paying off some long-term debt. 83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor,
D. Purchasing additional inventory on credit (accounts payable). 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?
87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before A. Jones obviously has too much debt when compared to its competitor.
borrowing P60,000 from the bank with a 3-month note payable. What effect did the B. Smith Company's times interest earned should be lower than Jones.
borrowing transaction have on Tyner Company's current ratio? C. Smith has five times better long-term borrowing ability than Jones.
582
D. Not enough information to determine if any of the answers are correct. Bonds payable, due in 10 years 500,000
Cash 100,000
Times interest earned Interest payable, due in three months 25,000
85. Which of the following will not cause times interest earned to drop? Assume no other changes Inventory 440,000
than those listed. Land 800,000
A. A rise in preferred stock dividends. Notes payable, due in six months 250,000
B. A drop in sales with no change in interest expense. What will happen to the ratios below if Ratio Company uses cash to pay 50 percent
C. An increase in interest rates. of its accounts payable?
D. An increase in bonds payable with no change in operating income. A. B. C. D.
Current ratio Increase Decrease Increase Decrease
DuPont Analysis Acid-test ratio Increase Decrease Decrease Increase
71. Which of the following could cause return on assets to decline when net profit margin is
increasing? Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad
A. sale of investments at year-end C. purchase of a new building at year-end Company at the end of the current year:
B. increased turnover of operating assets D. a stock split Accounts payable P145,000
80. A firm with a lower net profit margin can improve its return on total assets by Accrued liabilities 4,000
A. increasing its debt ratio C. increasing its total asset turnover Cash 80,000
B. decreasing its fixed assets turnover D. decreasing its total asset turnover Income tax payable 10,000
Inventory 140,000
PROBLEMS: Notes payable, short-term 85,000
Horizontal analysis Prepaid expenses 15,000
l
. 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 liii
. The amount of working capital for the company is:
2008. The respective net income reported by Kline Corporation for 2007 and 2008 are: A. P351,000 C. P211,000
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 B. P361,000 D. P336,000
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
liv
li
. The company’s current ratio as of the balance sheet date is:
. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in A. 2.67:1 C. 2.02:1
2007. The increase in net income of P300,000: B. 2.44:1 D. 1.95:1
A. can be stated as 0% C. cannot be stated as a percentage
B. can be stated as 100% increase D. can be stated as 200% increase lv
. The company’s acid-test ratio as of the balance sheet date is:
A. 1.80:1 C. 2.02:1
Liquidity ratios B. 2.40:1 D. 1.76:1
lii
. The following financial data have been taken from the records of Ratio Company:
Accounts receivable P200,000 Activity ratios
Accounts payable 80,000 Receivables turnover
583
lvi
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of lxi
. Selected information from the accounting records of Petals Company is as follows:
P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the Net sales for 2007 P900,000
year were P600,000 and P700,000, respectively. The receivables turnover was Cost of goods sold for 2007 600,000
A. 7.7 times. C. 9.3 times. Inventory at December 31, 2006 180,000
B. 10.8 times. D. 10.0 times. Inventory at December 31, 2007 156,000
Petals’ inventory turnover for 2007 is
lvii
. Milward Corporation’s books disclosed the following information for the year ended December A. 5.77 times C. 3.67 times
31, 2007: B. 3.85 times D. 3.57 times
Net credit sales P1,500,000
Net cash sales 240,000 lxii
. The Moss Company presents the following data for 2007.
Accounts receivable at beginning of year 200,000 Net Sales, 2007 P3,007,124
Accounts receivable at end of year 400,000 Net Sales, 2006 P 930,247
Milward’s accounts receivable turnover is Cost of Goods Sold, 2007 P2,000,326
A. 3.75 times C. 5.00 times Cost of Goods Sold, 2007 P1,000,120
B. 4.35 times D. 5.80 times Inventory, beginning of 2007 P 341,169
Inventory, end of 2007 P 376,526
Days receivable The merchandise inventory turnover for 2007 is:
lviii
. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the A. 5.6 C. 7.5
beginning of the year and a balance of P410,000 at the end of the year. The net credit sales B. 15.6 D. 7.7
during the year amounted to P4,000,000. Using 360-day year, what is the average collection
period of the receivables? lxiii
. Based on the following data for the current year, what is the inventory turnover?
A. 30 days C. 73 days Net sales on account during year P 500,000
B. 65 days D. 36 days Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Cash collection Accounts receivable, end of year 35,000
lix
. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in Inventory, beginning of year 90,000
accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of Inventory, end of year 110,000
P4,000. What was the cash collected from customers? A. 3.3 C. 3.7
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000
Days inventory
Inventory turnover lxiv
. Selected information from the accounting records of Eternity Manufacturing Company follows:
lx
. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for Net sales P3,600,000
2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What Cost of goods sold 2,400,000
was the inventory turnover for 2007? Inventories at January 1 672,000
A. 6.4 C. 5.3 Inventories at December 31 576,000
B. 6.0 D. 5.0 What is the number of days’ sales in average inventories for the year?
A. 102.2 C. 87.6
584
B. 94.9 D. 68.1 Net income P300,000

An analysis of the income statement revealed that interest expense was P100,000. Brava
Turnover ratios Company’s times interest earned (TIE) was
Asset turnover A. 5 times C. 3.5 times
Asset B. 4 times D. 3 times
lxv
. 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? lxix
. The balance sheet and income statement data for Candle Factory indicate the following:
A. P2,000,000. C. P2,800,000. Bonds payable, 10% (issued 1998 due 2022) P1,000,000
B. P1,200,000. D. P1,600,000. Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
Solvency ratios Income before income tax for year 350,000
Debt ratio Income tax for year 80,000
lxvi
. Jordan Manufacturing reports the following capital structure: Common dividends paid 50,000
Current liabilities P100,000 Preferred dividends paid 15,000
Long-term debt 400,000 Based on the data presented above, what is the number of times bond interest charges were
Deferred income taxes 10,000 earned (round to one decimal point)?
Preferred stock 80,000 A. 3.7 C. 4.5
Common stock 100,000 B. 4.4 D. 3.5
Retained earnings 170,000 lxx
. The following data were abstracted from the records of Johnson Corporation for the year:
What is the debt ratio? Sales P1,800,000
A. 0.48 C. 0.93 Bond interest expense 60,000
B. 0.49 D. 0.96 Income taxes 300,000
Net income 400,000
Times interest earned How many times was bond interest earned?
lxvii
. House of Fashion Company had the following financial statistics for 2006: A. 7.67 C. 12.67
Long-term debt (average rate of interest is 8%) P400,000 B. 11.67 D. 13.67
Interest expense 35,000
Net income 48,000 Net income
Income tax 46,000 lxxi
. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for
Operating income 107,000 the year was P20,000, and the company’s tax rate is 40%. The company’s net income is:
What is the times interest earned for 2006? A. P22,000 C. P54,000
A. 11.4 times C. 3.1 times B. P42,000 D. P66,000
B. 3.3 times D. 3.7 times
Profitability Ratios
lxviii
. Brava Company reported the following on its income statement: Return on Common Equity
Income before taxes P400,000 lxxii
. Selected information for Ivano Company as of December 31 is as follows:
Income tax expense 100,000 2006 2007
585
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
noncumulative share on December 31. Orchard’s net income for the year ended December 31 was P50,000.
Common stock 600,000 800,000 The yearly preferred dividend was declared. No capital stock transactions occurred. What
Retained earnings 150,000 370,000 was the price earnings ratio on Orchard’s common stock at December 31?
Dividends paid on preferred stock for the year 20,000 20,000 A. 6 to 1 C. 10 to 1
Net income for the year 120,000 240,000 B. 8 to 1 D. 16 to 1
Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for
lxxvi
2007 is . On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common
A. 17% C. 21% stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
B. 19% D. 23% outstanding.
Additional information:
Dividend yield Stockholders’ equity at 12/31/07 P4,500,000
lxxiii
. The following information is available for Duncan Co.: Net income year ended 12/31/07 1,200,000
2006 Dividends on preferred stock year ended 12/31/07 300,000
Dividends per share of common stock P 1.40 Market price per share of common stock at 12/31/07 144
Market price per share of common stock 17.50 The price-earnings ratio on common stock at December 31, 2007, was
Which of the following statements is correct? A. 10 to 1 C. 14 to 1
A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market B. 12 to 1 D. 16 to 1
price of their stocks.
B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns Payout ratio
lxxvii
on their investments. . Selected financial data of Alexander Corporation for the year ended December 31, 2007, is
C. The dividend yield is 12.5%, which is of interest to bondholders. presented below:
D. The dividend yield is 8.0 times the market price, which is important in solvency analysis. Operating income P900,000
Interest expense (100,000)
Market Test Ratios Income before income taxes 800,000
Market/Book value ratio Income tax (320,000)
Price per share Net income 480,000
lxxiv
. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book Preferred stock dividend (200,000)
value of equity of P3,000,000, and a market/book ratio of 3.5? Net income available to common stockholders Total Assets
A. P8.57 C. P85.70 P1,040,000
B. P30.00 D. P105.00
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
P/E ratio
lxxv
. Orchard Company’s capital stock at December 31 consisted of the following: . Answer: D
 Common stock, P2 par value; 100,000 shares authorized, issued, and Times interest earned: Earnings before interest ÷ Interest
outstanding. Income before tax (P48,000 + P46,000) P 94,000
 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares Add Interest expense 35,000
authorized, issued, and outstanding. Income before Interest expense P129,000
586
The dividend yield measures the return of investment in terms of dividends received. The
TIE: P129,000 ÷ P35,000 3.7 times total expected returns consists of Dividend Yield and the Appreciation in market price and
dividend
. Answer: A
TIE: Income before interest expense ÷ Interest expense . Answer: D
Income before income tax P400,000 Market Value of Equity (P3M x 3.5) P10,500,000
Add back Interest expense 100,000 Market price per share: (P10.5M ÷ 100,000) P105
Income before interest expense P500,000
. Answer: B
TIE: P500,000 ÷ P100,000 5 times EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
. Answer: C
Interest Expense: P1M x 0.1 P100,000 . Answer: D
Income before interest expense: P350,000 + P100,000 P450,000 EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
Times interest earned: (P450,000 ÷ P100,000) 4.5 times P/E Ratio: 144 ÷ 9 16
. Answer: C . Answer: A
Net income P400,000 Payout Ratio: Common Dividends ÷ Income Available to Common
Add: Income taxes P300,000 P120,000 ÷ P280,000 = 42.9%
Interest 60,000 360,000
Income before interest P760,000 . Answer: B
TIE: P760,000 ÷ P60,000 12.67 times EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
. Answer: B P/E Ratio: P60 ÷ P4 15.0X
Deduct interest expense 20,000 . Answer: C
Income before income tax P70,000 Payout Ratio: Dividends ÷ Income to Common
Deduct income tax (P70,000 x 0.4) 28,000 P40,000÷ P200,000 = 20.0%
Net income P42,000
. Answer: D
. Answer: D ROE: (8% x 1.25) 10.00%
Income to Common; (P240,000 – P20,000) P220,000 Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000 Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
Return on Common Equity: (P220 ÷ P960) 23 percent Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
The dividend yield is 8 percent (P1.40 ÷ P17.50) 1 – (0.03 ÷ 0.05) = 40%
587
Degree of Financial Leverage: Operating Income ÷ Interest Expense Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000
. Answer: A
Total stockholders’ equity P8,000,000 Net sales: (P950,000 x 5) P4,750,000
Deduct: Cost of goods sold (P1,150,000 x 4) 4,600,000
Liquidation value of Preferred Stock (50,000 s P110) P5,500,000 Gross margin P 150,000
Common Equity P2,200,000 . Answer: C
Book Value per Share: P2.2M ÷ 400,000 shares P5.50 Market price: 10 x 2.20 22.00
. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares . Answer: D
P140,000 ÷ 10,000 shares = P14.00 EBIT 1,250,000
. Answer: A Earnings before tax 1,000,000
The inventory amount can be calculated as follows: Less Income tax 40% 400,000
Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1 Net income 600,000
current ratio, the amount of working capital and current liabilities are both P1,120,000. Less Preferred dividends 200,000
Inventory: Current liabilities x (Current ratio – Acid test ratio) Earnings per share 400,000/25,000 16.00
P1,120,000 x (2.0 – 1.25) P840,000 Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40
A detailed computation can be made as follows: Dividend yield 6.4 ÷ (16 x 5) 8.0%
Liquid assets: P1,120,000 x 1.25 1,400,000 . Answer: B
Inventory P 840,000 280,000
Common stock dividends were P120,000. The payout ratio is:
. Answer: C A. 42.9 percent C. 25.0 percent
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers) B. 66.7 percent D. 71.4 percent
360,000/(15 – 10.5) = P80,000
P/E ratio & Payout ratio
. Answer: A Use the following information for question Nos. 33 and 34:
Inventory balance (P120,000 x (2.0 – 1.5) P 60,000 Terry Corporation had net income of P200,000 and paid dividends to common stockholders of
Cost of goods sold 60,000 x 8 P480,000 P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000
Sales (P480,000 ÷ 0.60) P800,000 shares. Terry Corporation’s common stock is selling for P60 per share in the local stock
588
exchange. Income Tax 40,000

Net Income P 80,000
lxxviii
. Terry Corporation’s price-earnings ratio is The degree of financial leverage is:
A. 3.8 times C. 18.8 times A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000
B. 15 times D. 6 times B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000
lxxix
. Terry Corporation’s payout ratio for 2007 is Other Ratios
A. P4 per share C. 20.0 percent Book value per share
B. 12.5 percent D. 25.0 percent lxxxiii
6% cumulative preferred stock, P100 par, liquidating value
DuPont Model was P110 per share; issued and outstanding 50,000 shares P5,000,000
Debt ratio Common stock, par, P5 per share; issued and
lxxx
. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and outstanding, 400,000 shares 2,000,000
asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total Retained earnings 1,000,000
debt ratio increase to achieve 20% ROE? Total P8,000,000
A. Total debt ratio must increase by .5 Dividends on preferred stock have been paid through 2006.
B. Total debt ratio must increase by 5 At December 31, 2007, M Corporation’s book value per share was
C. Total debt ratio must increase by 5% A. P5.50 C. P6.75
D. Total debt ratio must increase by 50% B. P6.25 D. P7.50
lxxxi
. Assume you are given the following relationships for the Orange Company: . The following data were gathered from the annual report of Desk Products.
lxxxiv
Sales/total assets 1.5X Market price per share P30.00

Return on assets (ROA) 3% Number of common shares 10,000
Return on equity (ROE) 5% Preferred stock, 5% P100 par P10,000
The Orange Company’s debt ratio is Common equity P140,000
A. 40% C. 35% The book value per share is:
B. 60% D. 65% A. P30.00 C. P14.00
B. P15.00 D. P13.75
Leverage Ratio
Degree of financial leverage Integrated ratios
lxxxii
. A summarized income statement for Leveraged Inc. is presented below. Liquidity & activity ratios
Sales P1,000,000 Inventory
Cost of Sales 600,000 lxxxv
. The current assets of Mayon Enterprise consists of cash, accounts receivable, and
Gross Profit P 400,000 inventory. The following information is available:
Operating Expenses 250,000 Credit sales 75% of total sales
Operating Income P 150,000 Inventory turnover 5 times
Interest Expense 30,000 Working capital P1,120,000
Earnings Before Tax P 120,000 Current ratio 2.00 to 1
589
Quick ratio 1.25 to 1 B. P200,000 D. P400,000

Average Collection period 42 days
Working days 360 Market Test Ratio
The estimated inventory amount is: Dividend yield
A. 840,000 C. 720,000 lxxxix
. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio
B. 600,000 D. 550,000 of 75%. The dividend yield is
A. 25.0% C. 7.5%
lxxxvi
. The following data were obtained from the records of Salacot Company: B. 22.0% D. 10.0%
Current ratio (at year end) 1.5 to 1
Inventory turnover based on sales and ending inventory 15 times xc
. The following were reflected from the records of Salvacion Company:
Inventory turnover based on cost of goods sold and ending inventory 10.5 times Earnings before interest and taxes P1,250,000
Gross margin for 2007 P360,000 Interest expense 250,000
What was Salacot Company’s December 31, 2007 balance in the Inventory account? Preferred dividends 200,000
A. P120,000 C. P 80,000 Payout ratio 40 percent
B. P 54,000 D. P 95,000 Shares outstanding throughout 2006
Preferred 20,000
Net sales Common 25,000
lxxxvii
.Selected data from Mildred Company’s year-end financial statements are presented below. Income tax rate 40 percent
The difference between average and ending inventory is immaterial. Price earnings ratio 5 times
Current ratio 2.0 The dividend yield ratio is
Quick ratio 1.5 A. 0.50 C. 0.40
Current liabilities P120,000 B. 0.12 D. 0.08
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40% Comprehensive
Mildred’s net sales for the year were xci
. The balance sheets of Magdangal Company at the end of each of the first two
A. P 800,000 C. P 480,000 years of operations indicate the following:
B. P 672,000 D. P1,200,000 2007 2006
Total current assets P600,000 P560,000
Gross margin Total investments 60,000 40,000
lxxxviii
.Selected information from the accounting records of the Blackwood Co. is as follows: Total property, plant, and equipment 900,000 700,000
Net A/R at December 31, 2006 P 900,000 Total current liabilities 150,000 80,000
Net A/R at December 31, 2007 P1,000,000 Total long-term liabilities 350,000 250,000
Accounts receivable turnover 5 to 1 Preferred 9% stock, P100 par 100,000 100,000
Inventories at December 31, 2006 P1,100,000 Common stock, P10 par 600,000 600,000
Inventories at December 31, 2007 P1,200,000 Paid-in capital in excess of par-common stock 60,000 60,000
Inventory turnover 4 to 1 Retained earnings 300,000 210,000
What was the gross margin for 2007?
Net income is P115,000 and interest expense is P30,000 for 2007.
A. P150,000 C. P300,000
What is the rate earned on total assets for 2007 (round percent to one decimal point)?
590

xcii
. What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)?
xciii
. What is the earnings per share on common stock for 2007, (round to two decimal places)?
A. P1.92 C. P1.77
B. P1.89 D. P1.42
xciv
. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to
one decimal point)?
A. 17.0 C. 12.4
B. 12.1 D. 15.9
591
i
. Answer: A
Total stockholders’ equity P8,000,000
Deduct:
Common Equity P2,200,000
Book Value per Share: P2.2M ÷ 400,000 shares P5.50

ii
. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares
P140,000 ÷ 10,000 shares = P14.00
iii
. 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.
iv
. Answer: C
v
. Answer: C
Current Assets:
Cash P100,000
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.
vi
. Answer: A
Working capital equals the difference between the total current assets and total current liabilities.
Current Assets:
Cash P 80,000
Inventory 140,000
Prepaid expense 15,000
Total Current Assets P595,000
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

vii
. Answer: B
Current Ratio: Current Assets ÷ Current Liabilities
(P595,000 ÷ P244,000) = 2.44:1.00
viii
. Answer: A
Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00
ix
. Answer: D
AR Turnover: Credit sales ÷ Average AR
6,500,000/650,000 = 10.0 times
x
. Answer: C
Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
xi
. 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
xii
. Answer: A
Sales P30,000
Add decrease in Accounts Receivable 1,000
Cash collected from sales P31,000
xiii
. 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.
xiv
. Answer: D
Average inventory: (P180,000 + P156,000) ÷ 2 P168,000
Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times
xv
. Answer: A
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times
xvi
. Answer: A
xvii
. 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
xviii
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
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
xix
. 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
Retained earnings 170,000 530,000
Total Assets P1,040,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
xx
. 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

xxi
. Answer: A
TIE: Income before interest expense ÷ Interest expense
Income before income tax P400,000
TIE: P500,000 ÷ P100,000 5 times

xxii
. 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
xxiii
. 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

xxiv
. Answer: B
Deduct interest expense 20,000
Deduct income tax (P70,000 x 0.4) 28,000
Net income P42,000
xxv
. 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
xxvi
. 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
xxvii
. Answer: D
Market Value of Equity (P3M x 3.5) P10,500,000
Market price per share: (P10.5M ÷ 100,000) P105
xxviii
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
xxix
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
xxx
. Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common
P120,000 ÷ P280,000 = 42.9%
xxxi
. Answer: B
EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
P/E Ratio: P60 ÷ P4 15.0X
xxxii
. Answer: C
Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
xxxiii
. 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%
xxxiv
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
xxxv
. Answer: B
Degree of Financial Leverage: Operating Income ÷ Interest Expense
xxxvi
. Answer: A
Deduct:

xxxvii
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
xxxviii
. 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:

Liquid assets: P1,120,000 x 1.25 1,400,000
Inventory P 840,000
xxxix
. Answer: C
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers)
360,000/(15 – 10.5) = P80,000
xl
. 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
xli
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

xlii
. Answer: C
Market price: 10 x 2.20 22.00
xliii
. Answer: D
EBIT 1,250,000
Earnings before tax 1,000,000
Less Income tax 40% 400,000
Net income 600,000
Less Preferred dividends 200,000
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%

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

xlvii
. Answer: A
P/E Ratio: P30 ÷ 1.766 = 17.0 times
xlviii
. Answer: A
Deduct:

xlix
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
l
. 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.
li
. Answer: C
lii
. Answer: C
Current Assets:
Cash P100,000
Inventory 440,000
Total current assets P740,000
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.
liii
. Answer: A
Working capital equals the difference between the total current assets and total current liabilities.
Current Assets:
Cash P 80,000
Inventory 140,000
Prepaid expense 15,000
Total Current Assets P595,000
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

liv
. Answer: B
Current Ratio: Current Assets ÷ Current Liabilities
(P595,000 ÷ P244,000) = 2.44:1.00
lv
. Answer: A
Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00
lvi
. Answer: D
AR Turnover: Credit sales ÷ Average AR
6,500,000/650,000 = 10.0 times
lvii
. Answer: C
Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
lviii
. 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
lix
. Answer: A
Sales P30,000
Add decrease in Accounts Receivable 1,000
Cash collected from sales P31,000
lx
. 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
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.
lxi
. Answer: D
Average inventory: (P180,000 + P156,000) ÷ 2 P168,000
lxii
. Answer: A
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times
lxiii
. Answer: A
lxiv
. 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
lxv
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

lxvi
. 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
Retained earnings 170,000 530,000
Total Assets P1,040,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

lxvii
. 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

lxviii
. Answer: A
TIE: Income before interest expense ÷ Interest expense
TIE: P500,000 ÷ P100,000 5 times

lxix
. 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
lxx
. 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

lxxi
. Answer: B
Deduct interest expense 20,000
Deduct income tax (P70,000 x 0.4) 28,000
Net income P42,000
lxxii
. 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
lxxiii
. 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
lxxiv
. Answer: D
Market Value of Equity (P3M x 3.5) P10,500,000
Market price per share: (P10.5M ÷ 100,000) P105
lxxv
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
lxxvi
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
lxxvii
. Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common
P120,000 ÷ P280,000 = 42.9%
lxxviii
. Answer: B
EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
P/E Ratio: P60 ÷ P4 15.0X
lxxix
. Answer: C
Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
lxxx
. 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%
lxxxi
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
lxxxii
. Answer: B
Degree of Financial Leverage: Operating Income ÷ Interest Expense
lxxxiii
. Answer: A
Deduct:

lxxxiv
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
lxxxv
. 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:

Liquid assets: P1,120,000 x 1.25 1,400,000
Inventory P 840,000
lxxxvi
. Answer: C
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers)
360,000/(15 – 10.5) = P80,000
lxxxvii
. 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
lxxxviii
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

lxxxix
. Answer: C
Market price: 10 x 2.20 22.00
xc
. Answer: D
EBIT 1,250,000
Earnings before tax 1,000,000
Less Income tax 40% 400,000
Net income 600,000
Less Preferred dividends 200,000
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%

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

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

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Financial Statement Analysis

D. An increase in bonds payable with no change in operating income. A. B. C. D.

Net credit sales P1,500,000

Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000

B. 12.5 percent D. 25.0 percent xxxvi

Current ratio (at year end) 1.5 to 1

A. P1.92 C. P1.77 A. The cost basis. C. The diversification of firms.

Return on investments Inventories

be quantified. A. The ratio remained unchanged.

B. 94.9 D. 68.1 Net income P300,000

exchange. Income Tax 40,000

Sales/total assets 1.5X Market price per share P30.00

Quick ratio 1.25 to 1 B. P200,000 D. P400,000

A. 9.3 percent C. 8.9 percent

Book Value per Share: P2.2M ÷ 400,000 shares P5.50

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

Working Capital P351,000

Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales

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

TIE: P129,000 ÷ P35,000 3.7 times

TIE: P500,000 ÷ P100,000 5 times

TIE: P760,000 ÷ P60,000 12.67 times

Book Value per Share: P2.2M ÷ 400,000 shares P5.50

Inventory: Current liabilities x (Current ratio – Acid test ratio)

A detailed computation can be made as follows:

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

Dividend yield 6.4 ÷ (16 x 5) 8.0%

EPS: (P106,000 ÷ 60,000) P1.77

Book Value per Share: P2.2M ÷ 400,000 shares P5.50

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

Working Capital P351,000

Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales

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

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

TIE: P129,000 ÷ P35,000 3.7 times

TIE: P500,000 ÷ P100,000 5 times

TIE: P760,000 ÷ P60,000 12.67 times

Book Value per Share: P2.2M ÷ 400,000 shares P5.50

Inventory: Current liabilities x (Current ratio – Acid test ratio)

A detailed computation can be made as follows:

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

Dividend yield 6.4 ÷ (16 x 5) 8.0%

EPS: (P106,000 ÷ 60,000) P1.77

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