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Chapter 04 - Answer-1
Chapter 04 - Answer-1
CHAPTER 4
FINANCIAL STATEMENTS ANALYSIS - I
I.
Questions
1. The objective of financial statements analysis is to determine the extent of
a firms success in attaining its financial goals, namely:
a. To earn maximum profit
b. To maintain solvency
c. To attain stability
2. Some of the indications of satisfactory short-term solvency or working
capital position of a business firm are:
1. Favorable credit position
2. Satisfactory proportion of cash to the requirements of the current
volume
3. Ability to pay current debts in the regular course of business
4. Ability to extend more credit to customers
5. Ability to replenish inventory promptly
3. These tests are:
1. Improvement in the financial position
2. Well-balanced financial structure between borrowed funds and
equity
3. Effective employment of borrowed funds and equity
4. Ability to declare satisfactory amount of dividends to
shareholders
5. Ability to withstand adverse business conditions
6. Ability to engage in research and development in an attempt to
provide new products or improve old products, methods or
processes
4-1
4-2
3. True
5. False
4-3
7. True
9. True
2. False
4. True
6. False
8. False
10. True
III. Problems
Problem 1 (Percentage Changes)
a. Accounts receivable decreased 16% (P24,000 decrease P150,000 =
16% decrease).
b. Marketable securities decreased 100% (P250,000 decrease P250,000 =
100% decrease).
c. A percentage change cannot be calculated because retained earnings
showed a negative amount (a deficit) in the base year and a positive
amount in the following year.
d. A percentage change cannot be calculated because of the zero amount of
notes receivable in 2005, the base year.
e. Notes payable increased 7 % (P60,000 increase P800,000 = 7 %
increase).
f. Cash increased 3% (P2,400 increase P80,000 = 3% increase).
g. Sales increased 10% (P90,000 increase P900,000 = 10% increase).
Problem 2 (Computing and Interpreting Rates of Change)
Requirement (a)
Computation of percentage changes:
1. Net sales increased 10% (P200,000 increase P2,000,000 = 10%
increase).
2. Total expenses increased 11% (P198,000 increase P1,800,000 = 11%
increase).
Requirement (b)
1. Total expenses grew faster than net sales. Net income cannot also have
grown faster than net sales, or the sum of the parts would exceed the size
of the whole.
2. Net income must represent a smaller percentage of net sales in 2006 than
it did in 2005. Again, the reason is that the expenses have grown at a
faster rate than net sales. Thus, total expenses represent a larger
percentage of total sales in 2006 than in 2005, and net income must
represent a smaller percentage.
4-4
Change
Peso
Assets
Cash and equivalents
Receivables
Inventories
Prepayments and others
Total current assets
Property, plant & equipment - net
of dep.
Total assets
Liabilities and Equity
Notes payable to banks
Accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Share capital
Retained earnings
Total equity
Total liabilities and equity
2005
2006
14,000
28,800
54,000
4,800
101,600
16,000
55,600
85,600
7,400
164,600
2,000
26,800
31,600
2,600
63,000
14.29%
93.06%
58.52%
54.17%
62.01%
30,200
131,800
73,400
238,000
43,200
106,200
143.05%
80.58%
10,000
31,600
4,200
5,800
51,600
44,600
35,600
80,200
131,800
54,000
55,400
6,800
7,000
123,200
44,600
70,200
114,800
238,000
44,000
23,800
2,600
1,200
71,600
0
34,600
34,600
106,200
440.00%
73.32%
61.90%
20.69%
138.76%
0.00%
97.19%
43.14%
80.58%
XYZ Corporation
Income Statement
Years ended December 31
(P thousands)
Change
Peso
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative
expenses
Income before income taxes
Income taxes
2005
266,400
191,400
75,000
2006
424,000
314,600
109,400
157,600
123,200
34,400
59.16%
64.37%
45.87%
35,500
39,500
12,300
58,400
51,000
16,400
22,900
11,500
4,100
64.51%
29.11%
33.33%
4-5
27,200
34,600
7,400
27.21%
while
Current
Liabilities
increased by 138.76%
while
Current
Liabilities
increased by 138.76%
while
Accounts
Receivable
increased by 93.06%
Requirement 2
Short-term financial position
1. Current
increased by 62.01%
Assets
Unfavorable
2. Quick
increased by 62.40%
Assets
Unfavorable
3. Net
increased by 59.16%
Sales
Unfavorable
4. Cost of
increased by 64.37%
Goods Sold
Favorable
Leverage
5. Total
increased by 80.58%
Assets
Unfavorable
6. Total
increased by 138.76%
Liabilities
Unfavorable
Profitability
7. Net
increased by 59.16%
Sales
Unfavorable
8. Net
Sales
increased by 59.16%
while
10. Net
Income
increased by 59.16%
Total
Liabilities
increased by 138.76%
while
Total
Equity
increased by 43.14%
while
Cost of
Goods Sold
increased by 64.37%
while
Selling,
General &
increased by 64.51%
Administrative
Expenses
while
Net
Income
increased by 27.21%
while
Total
Assets
increased by 80.58%
Unfavorable
increased by 27.21%
increased by 58.52%
while
Unfavorable
9. Net
Sales
Inventories
Unfavorable
Sales
Cash
Accounts receivable
Inventory
Total current assets
80.0
140.0
112.0
118.8
90.0
124.0
110.0
113.1
105.0
108.0
102.0
104.1
110.0
104.0
108.0
106.9
100.0
100.0
100.0
100.0
Current liabilities
130.0
106.0
108.0
110.0
100.0
Requirement (2)
Sales:
Assets:
Cash declined from Year 3 through Year 5. This may have been
due to the growth in both inventories and accounts receivable.
In particular, the accounts receivable grew far faster than sales
in Year 5. The decline in cash may reflect delays in collecting
receivables. This is a matter for management to investigate
further.
Liabilities:
4-7
11. A, C, D
4-8
2.
3.
4.
5.
6.
7.
8.
9.
10.
A
A
B
D
C
C
A
D
C
12. B*
13. D
4-9