NAME: LAGRIMAS, SARAH NICOLE S.

COURSE, YEAR, & SECTION: BSMA 2-7

FINANCIAL STATEMENTS ANALYSIS

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True or False
1. Common-size statements are financial statements of companies of similar size.
2. One limitation of vertical analysis is that it cannot be used to compare two companies that
are significantly different in size.
3. The sale of used equipment at book value for cash will increase earnings per share.
4. An increase in the number of shares of common stock outstanding will decrease a
company's price-earnings ratio if the market price per share remains unchanged.
5. If a company's acid-test ratio increases, its current ratio will also increase.
6. Short-term borrowing is not a source of working capital
7. Profitability ratios are frequently used as a basis for evaluating management's operating
effectiveness

MC THEORIES

1. Which of the following below generally is the most useful in analyzing companies of
different sizes?
a. comparative statements
b. common-sized financial statements
c. price-level accounting
d. audit report
e. trend analysis

2. A balance sheet that displays only component percentages is called

a. trend balance sheet
b. comparative balance sheet
c. condensed balance sheet
d. common-sized balance sheet
e. trend analysis

3. In horizontal analysis each item is expressed as a percentage of the

a. base year figure
b. retained earnings figure
c. total assets figure
d. net income figure
e. all of the above

4. The acceleration in the collection of receivables will tend to cause the accounts receivable
turnover to
a. decrease
b. remain the same
c. either increase or decrease
d. increase

5. A company with P60,000 in current assets and P40,000 in current liabilities pays a P1,000
current liability. As a result of this transaction, the current ratio and working capital will
a. both decrease
b. both increase
c. increase and remain the same, respectively
d. remain the same and decrease, respectively

6. Roselyn Corp has a 2 to 1 current ratio. This ratio would increase if

a. The company wrote off an uncollectible receivable
b. The company purchased inventory on open account
NAME: LAGRIMAS, SARAH NICOLE S.
COURSE, YEAR, & SECTION: BSMA 2-7

c. The company sold merchandise on open account that earned a normal gross
margin
d. A previously declared stock dividend were distributed

7. A measure of the company’s long term debt paying ability is

a. Return on assets
b. Dividend out ratio
c. Times interest earned ratio
d. Operating cycle

8. Financial ratio, which assess the profitability of a company, include all of the following
except:
a. Dividend yield ratio
b. Gross profit rate
c. Earnings per share
d. Return on sales

9. Kevin Inc. has a current ratio of 0.65 to 1. A cash dividend declared last month is paid this
month. What is the effect of this dividend payment on the current ratio and working capital
respectively?
a. Rise and decline
b. Rise and no effect
c. Decline and no effect
d. No effect on both ratios

10. A high receivable turnover ratio indicates

a. Many customers are not paying the company’s receivables
b. Customers are making payments quickly
c. The company’s sales have increased
d. A large portion of the company’s sales are on credit

INCREASE/DECREASE/NO EFFECT

State the effect of the following transactions on the current ratio. Use increase, decrease, or no
effect for your answer. Assume the current ratio is currently greater than 1.

1. Collection of an accounts receivable - No Effect

2. Collection of an accounts receivable within the discount period - Decrease
3. Declaration of cash dividends - Decrease
4. Additional stock is sold for cash - Increase
5. Accounts payable are paid - Increase
6. Equipment is purchased for cash - Decrease
7. Inventory purchases are made for cash - No Effect
8. Inventory purchases are made on account - Decrease
9. Sold an inventor on account - Increase
10. Sold an inventory for cash - Increase

State the effect of the following transactions on the current ratio. Use increase, decrease, or no
effect for your answer. Assume the current ratio is currently less than 1.

11. Collection of an accounts receivable - No Effect

12. Collection of an accounts receivable within the discount period - Decrease
13. Declaration of cash dividends - Decrease
14. Additional stock is sold for cash - Increase
15. Accounts payable are paid - Decrease
16. Equipment is purchased for cash - Decrease
17. Inventory purchases are made for cash - No Effect
NAME: LAGRIMAS, SARAH NICOLE S.
COURSE, YEAR, & SECTION: BSMA 2-7

18. Inventory purchases are made on account - Increase

19. Sold an inventory on account - Increase
20. Sold an inventory for cash - Increase
NAME: LAGRIMAS, SARAH NICOLE S.
COURSE, YEAR, & SECTION: BSMA 2-7

PROBLEMS ANSWER

PROBLEM #1

SOPHIA TRADING CORP.

Balance sheet
December 31
2019 2018
Assets
Current assets
Cash - 4,800.00- 1% - 4,200.00- 1%
Marketable securities - 2,700.00- 0.38% - 1,800.00- 0.27%
Accounts receivable, net - 72,000.00- 10% - 66,000.00- 10%
Inventory - 120,000.00- 17% - 102,000.00- 15%
Prepaid insurance - 1,500.00- 0.21% - 1,800.00- 0.27%
Total current assets - 201,000.00- 28% - 175,800.00- 26%
Long-term investment - 3,000.00- 0.42% - 3,300.00- 0.50%
Property and Equipment
Land - 36,000.00- 5% - 36,000.00- 5%
Building, net - 330,000.00- 46% - 312,000.00- 47%
Equipment, net - 150,000.00- 21% - 138,000.00- 21%
Total Property and Equipment, net - 516,000.00- 72% - 486,000.00- 73%
TOTAL ASSETS - 720,000.00- 100% - 665,100.00- 100%

Liabilities
Current liabilities
Accounts payable - 45,000.00- 6% - 42,300.00- 6%
Accrued expenses - 13,200.00- 2% - 12,600.00- 2%
Notes payable - 21,800.00- 3% - 17,400.00- 3%
Total current liabilities - 80,000.00- 11% - 72,300.00- 11%
Long-term liabilities - 220,000.00- 31% - 216,000.00- 32%
TOTAL LIABILITIES - 300,000.00- 42% - 288,300.00- 43%
Shareholder's equity
Preferred stock, P200 par value at 8% - 36,000.00- 5% - 36,000.00- 5%
Common stock, P10 par value - 150,000.00- 21% - 144,000.00- 22%
Additional paid in capital - 24,000.00- 3% - 22,800.00- 3%
Retained earnings - 210,000.00- 29% - 174,000.00- 26%
TOTAL STOCKHOLDER'S EQUITY - 420,000.00- 58% - 376,800.00- 57%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY - 720,000.00- 100% - 665,100.00- 100%

SOPHIA TRADING CORP.

Income and retained earnings statement
December 31
2019 2018

Net Sales - 522,000.00- 100% - 492,000.00- 100%

Less: Cost of Sales - 365,580.00- 70% - 338,100.00- 69%
Gross profit - 156,420.00- 30% - 153,900.00- 31%
Less: Operating expenses - 42,000.00- 8% - 40,200.00- 8%
Net operating income - 114,420.00- 22% - 113,700.00- 23%
Less: Interest expenses - 24,180.00- 5% - 23,340.00- 5%
Net Income before tax - 90,240.00- 17% - 90,360.00- 18%
Less: Taxes expense - 22,560.00- 4% - 22,590.00- 5%
Net Income - 67,680.00- 13% - 67,770.00- 14%
Add: Retained earnings, beg. - 174,000.00- 33% - 136,710.00- 28%
Total - 241,680.00- 46% - 204,480.00- 42%
Less: Dividends - 31,680.00- 6% - 30,480.00- 6%
Additional to Retained Earnings - 210,000.00- 40% - 174,000.00- 35%
 SOPHIA TRADING CORP.
Balance sheet
December 31
2019 2018
Assets
Current assets
Cash - 4,800.00- - 4,200.00- 14%
Marketable securities - 2,700.00- - 1,800.00- 50%
Accounts receivable, net - 72,000.00- - 66,000.00- 9%
Inventory - 120,000.00- - 102,000.00- 18%
Prepaid insurance - 1,500.00- - 1,800.00- -17%
Total current assets - 201,000.00- - 175,800.00- 14%
Long-term investment - 3,000.00- - 3,300.00- -9%
Property and Equipment
Land - 36,000.00- - 36,000.00- 0%
Building, net - 330,000.00- - 312,000.00- 6%
Equipment, net - 150,000.00- - 138,000.00- 9%
Total Property and Equipment, net - 516,000.00- - 486,000.00- 6%
TOTAL ASSETS - 720,000.00- - 665,100.00- 8%

Liabilities
Current liabilities
Accounts payable - 45,000.00- - 42,300.00- 6%
Accrued expenses - 13,200.00- - 12,600.00- 5%
Notes payable - 21,800.00- - 17,400.00- 25%
Total current liabilities - 80,000.00- - 72,300.00- 11%
Long-term liabilities - 220,000.00- - 216,000.00- 2%
TOTAL LIABILITIES - 300,000.00- - 288,300.00- 4%
Shareholder's equity
Preferred stock, P200 par value at 8% - 36,000.00- - 36,000.00- 0%
Common stock, P10 par value - 150,000.00- - 144,000.00- 4%
Additional paid in capital - 24,000.00- - 22,800.00- 5%
Retained earnings - 210,000.00- - 174,000.00- 21%
TOTAL STOCKHOLDER'S EQUITY - 420,000.00- - 376,800.00- 11%
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY - 720,000.00- - 665,100.00- 8%

SOPHIA TRADING CORP.

Income and retained earnings statement
December 31
2019 2018

Net Sales - 522,000.00-

- 492,000.00- 6%
Less: Cost of Sales - 365,580.00-
- 338,100.00- 8%
Gross profit - 156,420.00-
- 153,900.00- 2%
Less: Operating expenses - 42,000.00-
- 40,200.00- 4%
Net operating income - 114,420.00-
- 113,700.00- 1%
Less: Interest expenses - 24,180.00-
- 23,340.00- 4%
Net Income before tax - 90,240.00-
- 90,360.00- -0.13%
Less: Taxes expense - 22,560.00-
- 22,590.00- -0.13%
Net Income - 67,680.00-
- 67,770.00- -0.13%
Add: Retained earnings, beg. - 174,000.00-
- 136,710.00- 27%
Total - 241,680.00-
- 204,480.00- 18%
Less: Dividends - 31,680.00-
- 30,480.00- 4%
Additional to Retained Earnings - 210,000.00-
- 174,000.00- 21%
a. Liquidity ratio
i. 2019 2018
Current assets - 201,000.00- - 175,800.00-
Current liabilities - 80,000.00- - 72,300.00-
Current ratio - 2.51- - 2.43-

ii. Quick assets - 79,500.00- - 72,000.00-

Current liabilities - 80,000.00- - 72,300.00-
Quick ratio - 0.99- - 1.00-

iii. Cash and Cash E. - 4,800.00- - 4,200.00-

Current liabilities - 80,000.00- - 72,300.00-
Cash ratio - 0.06- - 0.06-

b. Asset management ratio

2019 2018
i. Cost of sales - 365,580.00- - 338,100.00-
Average inventory - 111,000.00- - 111,000.00-
ITR - 3.29- - 3.05-

ii. No. of days - 365.00- - 365.00-

ITR - 3.29- - 3.05-
ASP - 110.82- - 119.83-

iii. Sales - 522,000.00- - 492,000.00-

AAR - 69,000.00- - 69,000.00-
ARTO - 7.57- - 7.13-

iv. No. of days - 365.00- - 365.00-

ARTO - 7.57- - 7.13-
ACP - 48.25- - 51.19-

v. ASP ( 111) ( 120)

ACP ( 48) ( 51)
OC ( 159) ( 171)

vi. Sales - 522,000.00- - 492,000.00-

AFA - 501,000.00- - 663,000.00-
FATO - 1.04- - 0.74-

vii. Sales - 522,000.00- - 492,000.00-

ATA - 692,550.00- - 692,550.00-
TATO - 0.75- - 0.71-

c. Debt management ratios

i Purchase on account - 383,500.00-
AAP - 87,300.00-
APTO - 4.39-

ii. EBIT - 114,420.00-

Interest expense - 24,180.00-
TIER - 4.73-

iii. EBIT + FC
Interest + FC
FCCR

iv. - 522,000.00-
- 501,000.00-
FCCR - 1.04-
d. Profitability ratios
i. Gross profit - 156,420.00-
Sales - 522,000.00-
GP Margin - 0.30-

ii. Operating profit - 114,420.00-

Sales - 522,000.00-
OP Margin - 0.22-

iii. Net income - 67,680.00-

Sales - 522,000.00-
Profit Margin - 0.13-

iv. NACS - 64,800.00-

Sales - 522,000.00-
ROS - 0.12-

v. NICS - 64,800.00-
ATA - 692,550.00-
ROA - 0.09-

vi. NICS - 64,800.00-

ASE - 398,400.00-
ROE - 0.16-

vii. NIACS - 64,800.00-

ANCS - 14,400.00-
EPS - 4.50-

viii. DCS - 522,000.00-

ANCSO - 501,000.00-
DPS - 1.04-

ix. Dividends per share - 1.04-

Earnings per share - 4.50-
DPOR - 0.23-

e. Market ratios
i. Market price per share - 20.00-
EPS - 4.50-
PER - 4.44-

ii. Market price per share - 20.00-

BV - 4.50-
MBR - 4.44-

iii. DPS - 1.04-

Market price per share - 20.00-
DYR - 0.05-

PROBLEM #2

1 2018 2017 (x-2,000,000)

-0.4 =
- 1,200,000.00- - 2,000,000.00- -40% 2,000,000

2 2019 2018 (x-1,200,000)

2.75 =
-4,500,000.00- - 1,200,000.00- 275% 1,200,000

PROBLEM #3

1 Current assets - 740,000.00-

Current Ratio = = = 2.08
Current liabilities - 355,000.00-
 2 Quick assets - 300,000.00-
Quick Ratio = = = 0.85
Current liabilities - 355,000.00-

3 Current assets - 760,000.00-

Current Ratio = = = 2.14
Current liabilities - 355,000.00-

4 Quick assets - 370,000.00-

Quick Ratio = = = 1.04
Current liabilities - 355,000.00-

PROBLEM #4

1 Current assets 595,000.00

current liabilities- 244,000.00-
working capital 351,000.00

2 accounts receivable 110,000.00

cash 80,000.00
marketable securities 250,000.00
quick assets 440,000.00

PROBLEM #5

1. What was the inventory turnover for 2019? 3 times

Inventory Turnover on 2019 = 480,000 / ((140,000 + 180,000) / 2 ) = 3

2. Days in inventory is 122 days

Days in inventory = 365 days / 3
Days in inventory = 121.67 days

3. The times interest earned ratio of Salas Company was 3.25 times. The interest expense for the
year was P30,000 and the company’s tax rate is P40%. What was company’s net income? P58,500
EBIT = TIE ratio x interest expense = 3.25 x P30,000 = P97,500
Net income = EBIT x (1 - tax rate)
Net income = P97,500 x (1 - 0.4) = P58,500

PROBLEM #6

240,000 - 120,000
ROCE =
[(1,000,000 + 1,420,000)/2] - [(250,000 + 250,000)/2]

120000
ROCE =
2,420,000 - 250,000

120000
ROCE =
2170000

ROCE = 0.05529953917 or 6%

PROBLEM #7

EPS = 1,200,000 / 50,000

EPS = P24 per share

PER = 144 / P24

PER = 6

PROBLEM #8

1. The estimated inventory amount. P840,000

Working capital = Current Asset - Current liabilities
 P1,120,000 = Current Asset - Current liabilities
Current liabilities = Current Asset - P 1,120,000
Current Ratio = Current Assets / Current Liabilities
Current Asset = P 2,240,000
Current liabilities =  P 1,120,000

Quick Asset = Current Asset - Inventory / Current Liabilities

1.25 = 2,240,000 - Inventory / 1,120,000
Inventory = P840,000

2. Cash conversion cycle. 78 days

Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding 
Cash Conversion Cycle = 72 days + 42 days - 36 days
Cash Conversion Cycle = 78 days 

PROBLEM #9

1. What was RCR’s December 31, 2019 balance in inventory account? P80,000
Inventory Turnover: 15 - 11 = 320,000 / Inventory
Inventory Account = 320,000 / 4 = 80,000

2. What was RCR’s December 31, 2019 balance in Accounts Receivable? P33,000
Accounts Receivable = 432,000 - 294,000 - 25,000 - 80,000 = 33,000

3. What was RCR’s December

P40,000
31, 2019 balance in Retained Earnings?
Retained Earnings Balance = RE
Total Equity = Common Stock + Retained Earnings

Total Liabilities = Total Assets - Total Equity

432,000 - (200,000 + RE)
432,000 - 200,000 - RE
232,000 - RE

Debt to equity = Total Liabilities / Total Equity

0.8 = (232,000 - RE) / (200,000 + RE)
0.8 (200,000 + RE) = 232,000 - RE
160,000 + 0.8(RE) = 232,000 - RE
0.8(RE) + RE = 232,000 - 160,000
1.8(RE) = 72,000
1.8 1.8
Retained Earnings = 40,000

PROBLEM #10
Let, Current liabilities= X

Current ratio = 3:1

Current assets / current liabilities = 3
Current assets = 3X
Net working capital = P40,000
Current assets - Current liabilities = P40,000

3X - X = P40,000
X = P20,000
Current liabilities = P20,000
Current assets = P20,000 x 3= P60,000

Desired current ratio = 5:1

If current liabilities are paid by P8,000
Then current liabilities = P20,000 - P8,000 = P12,000
Current asset = P60,000
Current ratio = P60,000 / P12,000 = 5:1

Hence, the current liabilities of P6,000 should be paid to achieve minimum current ratio.

PROBLEM #11
Sales revenue= X
Now:
(Sales Revenue - Cost of goods sold - Operating expenses) x (1-tax rate) = Net income
(X - P250,000 - P150,000) x (1-0.35) = X x 23.4%
0.65X - P260,000 = 0.234X
0.416X = P260,000
X= P260,000 / 0.416 = P625,000

Hence, the sales revenue is P625,000