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Name: Deborah Blanca R. Esquivias Score: ____________________

Year/Course/Section: _______________ Schedule:__________________

Financial Management Part 2 Handouts

Analysis and Interpretation of Financial Statements

DIRECTION: ANSWER THE FOLLOWING:

1. The following ratios were computed from Siason Company’s financial statements for 2014:
Return on asset 24%
Asset turnover 1.6 times
What is the company’s profit margin ratio?
a. 38.4% c. 15.0%
b. 6.0% d. 24.0%

Solution: (1/1.6) x 0.24 = 15%

2. The following figures taken from Ethaniel Company’s financial statement for the calendar
years 2015 and 2014:
2015 2014
Total Asset P900,000 P750,000
Long-term debt (12% interest rate) 125,000

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8% Preferred stocks, P100 par value 225,000 225,000
Total stockholders’ equity 600,000 550,000

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Net income (after tax of 30%) 70,000
What is the return on average total assets?
a. 9.75% o.
c. 12.95%
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b. 10.50% d. 14.90%
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Solution: 70,000 / [(900,000+750,000)/2] = 70,000 / 825,000 = 8.48%

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3. The following information was taken from last year’s financial statements of Dianice
Industries:
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Current liabilities P 60,000

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Long-term liabilities 180,000

Preferred Stock 50,000
Number of common shares outstanding 10,000
The company has a debt-to-equity ratio of 0.96 to 1 at the end of last year. What was the
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book value per share at the end of last year?

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a. P13.75 c. P25.00
b. P20.00 d. P49.00

Solution: (60,000+180,000)/0.96 = 250,000 / 10,000 = P25.00

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4. Net sales, P1,800,000; Cost of goods sold, P1,080,000; Operating expenses, P315,000; Net
income, P195,000; total stockholders’ equity, P750,000; Total assets, P1,000,000; cash flow
from operating activities, P25,000
The return on investment is:
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a. 22.5% c. 19.5%
b. 26.5% d. 40.5%

Solution: ROI = NI / Total Assets = 195,000 / 1,000,000 = 19.5%

5. Based on No. 4, the cash flow margin is:

a. 1.4% c. 10.8%
b. 2.5% d. 12.8%

Solution: CFM = CFO / Net Sales = 25,000 / 1,800,000 = 1.4%

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6. If a company has a current assets of P200,000, including inventory of P80,000 and a quick
ratio of 2:1, what is the value of the company’s current liabilities:
a. P100,000 c. P240,000
b. P140,000 d, P 60,000

Solution: Quick Ratio = (CA-Inventory)/CL = (200,000-80,000)/CL = 2

120,000/2 = CL = 60,000

7. C. Atienza Company’s equity balances as of the end of 2014 are as follows:

6% Cumulative, fully participating preferred stocks, P200 par value, with liquidation value of
P220, P400,000; common stocks, P40 par value; P800,000; and retained earnings,
P1,024,000. No dividends were declared during the year. C. Atienza Company’s book value
per share of common stock is:
a. P111.20 c. P91.20
b. P 88.00 d. P89.20

Solution: # of common shares = 800,000 / P40 = 20,000 shares

(400,000 + 800,000 + 1,024,000) / 20,000 = P111.20

8. As of the end of 2014, Ice Company had total assets of P375,000 and equity of P206,250.
For 2015, its budget for capital investment project is P62,500. To finance a portion of the
capital budget, the company may borrow from a bank which sets a condition that the loan
would be approved, provided that the 2015 debt to equity ratio should be the same as the
debt-to-equity ratio in 2014. How much debt should be incurred to satisfy the banks

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condition?
a. 28,125
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c. P34,375

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b. 62,500 d. P51,138
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Solution: Asset – Equity = Liability = 375,000 – 206,250 = 168,750
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D/E = 168,750/206,250 = 0.8182 x P62,500 = P51,138

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9. During the year, Tindugan Company earned net income of P60,000. For next year, it has a
capital budget of P80,000. If the company’s plowback ratio is 30%, how much external
funding is needed for the capital investment project?
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a. 80,000 c. P56,000
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b. 62,000 d. P98,000
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Solution: External Funding = 80,000 – (60,000 x 30%) = P62,000

10. The following selected data were taken from Magallado Company’s income statement for the
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calendar year 2015:

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Net sales P334,000

Gross income 103,600
Interest expense 4,000
Income tax 9,600
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Net income 30,800

Gain on sale of business segment, net of tax 16,800
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The number of times interest was earned in 2015 was:

a. 7.70 c. 6.9
b. 0.57 d. 3.5
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Solution: (44,400 – 16800) / 4,000 = 6.9

11. Last year’s asset turnover of Johnvic Company was 3.0. This year, the company’s sales
increased by 25% and average total assets decreased by 5%. What is this year’s asset
turnover?
a. 3.9 c. 3.4
b. 3.6 d. 3.1

Solution: (1.25 / 0.95) x 3 = 3.9

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12. Following are selected data taken from the records of Jemson Company
Income before tax P200,000
Income tax rate 40%
Dividend payout ratio 0.80
Number of common shares outstanding 10,000
How much dividends per share was paid by the company during the year?
a. 9.60 c. 16.00
b. 6.40 d. 15.00

Solution: DPR = Div/NI = Div / 120,000 = 0.80

Div = 120,000 x 0,80 = 96,000/10,000 = 9.60

13. In 2014, Sweet Company paid out 50% of its earnings in dividends. In 2015, its earnings
decreased by 20% and its dividends decreased by 10%. What is the company’s dividend
payout ratio in 2015?
a. 62.50% c. 50.00%
b. 56.25% d. 78.00%

Solution: 0.90/0.80 x 0.50 = 56.25%

14. What is the company’s dividend yield on common stock if its asset turnover is 0.90, payout
ratio is 0.60; and price earnings ratio is 12?
a. 7.2% c. 5%
b. 10.8% d. 9%

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Solution: Div/SP = Div/NI x NI/SP = 0.60 / 12 = 5%

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15. At the end of 2014, Gabbuat Company’s total assets was P500,000. In 2015, it earned net
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income of P30,000 and paid dividends of P10,000. What is the company’s internal growth
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rate?
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a. 1.5% c. 5.0%
b. 4.0% d. 9.0%

Solution: SGR = ROE x (1-DPR) = 30,000/500,000 x (1- (10,000/30,000)) = 4%

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16. Jumawan Company had sales of P300,000 in 2014 when the price level index for its industry
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was 320. In 2015, the price level index is expected to decrease in 300. What is the level of
sales that Jumawan Company should reach in 2015 in order to achieve a real growth rate of
30%
a. 416,000 c. 390,000
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b. 365,625 d. 320,000
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Solution: 300,000 x 1.3 = 390,000

17. The following data were taken from the financial statements of Macarambon Company for
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2015:
Total Assets P500,000
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Current Liabilities 100,000

Long-term liabilities 150,000
Stock-holders’ equity 250,000
Operating income after taxes 70,000
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If the company’s weighted-average cost of capital is 10%, what is its economic value added?
a. 45,000 c. 30,000
b. 35,000 d. 20,000

Solution: EVA = Net Investments x (ROI – WACC) = 500,000 x (70,000/500,000 – 10%) =

20,000

18. In 2015, Matanguihan Company earned an after-tax operating income of P400,000. As of the
end of the year, it had an equity capital of P1,600,000, with an after-tax weighted average
cost of capital of 15%. Its liabilities are composed solely of short-term, non-interest bearing
notes and accounts payable amounting to P80,000. What is the Matanguihan Company’s
economic value added?
a. 148,000 c. 60,000
b. 160,000 d. 240,000

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Solution: EVA = Net Investments x (ROI – WACC) = (1,600,000+80,000) x (400,000/1,680,000

– 15%) = 148,000

19. For the year 2015, Macarambon Company’s income statement shows operating expenses of
P204,800. The following information is also available:
Prepaid expenses, 1/1/2015 P12,000
Accrued expenses, 1/1/2015 33,600
Prepaid expenses, 1/1/2016 16,800
Accrued expenses, 1/1/2016 28,000
How much was the cash paid for operating expenses?
a. 204,800 c. 193,600
b. 194,400 d. 215,200

Solution: 204,800 + (16,800-12,000) + (33,600-28,000) = 215,200

20. In 2015, Rovi Company’s land account decreased by P600,000 because of a cash sale for the
same amount. Its equipment account increased by P240,000 as a result of a cash purchase,
and its bonds payable increased by P800,000 due to an issuance for cash at face value. The
net cash provided by investing activities is:
a. 360,000 c. P 840,000
b. 600,000 d. P1,160,000

Solution: 600,000 – 240,000 = 360,000

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21. In financial statement analysis, expressing all financial items as a percentage of base year

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amounts is called:
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a. Trend analysis c. Horizontal common-sized analysis
b. Variance analysis o.
d. Vertical common-sized analysis
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22. In financial statements analysis, expressing figures of a single year as a percentage of a

base amount on the financial statement (for example, total assets in a balance sheet or sales
in an income statement) is called:
a. Trend analysis c. Horizontal common-sized analysis
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b. Variance analysis d. Vertical common-sized analysis

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23. Which of the following statement is correct?

a. Liquidity refers to the firm’s ability to pay all its obligations and to continue operations
b. Solvency refers to a firm’s ability to survive in the long-term by paying its-short-term
obligations
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c. Trading on the equity refers to a firm-s sale of its own stocks in the stock market
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d. Ratio analysis addresses such issues as the firm’s liquidity, use of leverage,
management of assets, cost control, growth and valuation

24. Solvency is a firm’s ability to survive in the long-term by paying its long-term obligations. Its
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key ingredients are capital structure and earning power. Capital structure consists of:
a. The capital stocks of the firm
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b. The firm’s total assets

c. The firm’s sources of financing, whether long-term or short-term, of its assets
d. The stockholders’ equity accounts
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25. Financial leverage or trading on equity is advantageous when:

a. All of the corporation’s authorized capital stocks have already been issued
b. A firm has an available credit line with its depositary bank
c. Earnings from borrowed funds exceed borrowing costs
d. A firm is in financial distress

26. Through financial statement analysis, interested parties — such as managers, investors, and
creditors — can identify the company’s financial strengths and weaknesses and know about
the following except:
a. Profitability of the business firm
b. The firm’s ability to meet its obligations
c. Safety of the investment in the business
d. Composition of management running the firm

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27. Financial statements analysis is not without problems and limitations. Among such
limitations is as follows, except:
a. A ration that is acceptable to one company may not be acceptable to another when
some other factors are considered
b. There may be some differences in the accounting methods and estimates used by
companies so that comparison of their ratios may not be advisable
c. Financial statements are based on current market value of the firm’s assets, therefore
they do not reflect historical costs
d. The timing of transactions and use of averages in applying the various techniques in
financial statement analysis affect the results to be obtained.

28. Which of the following is not a limitation of ratio analysis affecting comparability among
firms?
a. Provision of useful information regarding the efficiency of operations and the stability
of financial conditions
b. Different sources of information
c. Different accounting periods
d. Different accounting policies

29. In assessing the financial health of a firm, financial analysis use different techniques. One
technique is the vertical, common-size analysis, an example of which is:
a. Total current assets is 20% of the total assets as of a certain dates
b. Total current assets is as of a certain date is 20% greater compared with the previous
year

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c. The finished goods inventory turnover is twelve times during the year

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d. Cash provided by operations is P100,000

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30. Price level changes affect financial statements analysis. In measuring price level changes,
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some indices are used. An example of such indices is the Gross Domestic Product (GDP)
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price index or GDP deflator, which:

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a. Measures price level by a monthly pricing of a specified set of goods and services
purchased by a typical urban customer
b. Includes the prices of all goods and services produced in the country
c. Measures the price of specified commodities at the time of their first commercial sale
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d. Is the amount charged by one organizational unit for the transfer of goods or services
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to another organizational unit within the same firm.

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………………………………NOTHING FOLLOWS………………………………
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