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DEPARTMENT OF ACCOUNTANCY

Marawi City

Accounting 142

General purpose financial statements contain historical

financial information about a firms financial condition,

operating results and other business activities. They serve as

a communication link between the firm and various

interested parties.

Major users of an entitys financial statements are its

creditors, investors and management. Creditors, whether

short-term (i.e. suppliers) or long-term (i.e. lenders), want to

be assured of receiving prompt payment from the

company. Investors, on the other hand, want to determine

if the company will be able to distribute dividends in the

future and if its shares will rise in value. Finally, managers

monitor the companys overall performance as part of its

functions.

When users read a firms financial statements, they get an

overall picture of the firms profitability and financial

conditions. Merely reading such statements, however, is not

enough when for them make informed judgments and

decisions. A thorough analysis and interpretation of such

statements is required.

Financial statement analysis involves the careful selection

of data from financial statements in order to assess and

evaluate the firms past performance, its present condition

and future business potentials. Financial statement analysis

interprets financial statement data and presents it in a

summary form to simplify users analysis.

Objectives of Financial Statement Analysis

The primary purpose of financial statement analysis is to

evaluate and forecast the companys financial health.

Financial statement analysis helps identify the companys

financial strengths and weaknesses and provide information

about the:

A. Profitability of the business firm.

B. Ability of the firm to meet its obligations.

C. Safety of the investment in the business.

D. Effectiveness of management in running the firm.

Specifically, the uses and purposes of financial performance

analysis are:

A. To set goals and targets for future operations.

B. To compare the firms performance to others.

C. To measure financial strength for granting purposes.

D. To spot trends, weaknesses and potential problems.

E. To evaluate alternative courses of action.

F. To understand interactions that financial changes

have on a firms financial position.

Steps in the Analysis of Financial Statements

The analysis of financial statements does not merely involve

computation of some relevant ratios and amounts. Listed

below are the steps undertaken in performing an effective

analysis of financial statements:

A. Establish the objectives of the analysis to be

conducted.

B. Study the industry where the firm belongs.

C. Study the firms background and the quality of its

management.

D. Evaluate the firms financial statements using the

evaluation techniques available.

E. Summarize the results of the study and evaluation

conducted.

F. Develop conclusions relevant to established

objectives.

TECHNIQUES USED IN FINANCIAL STATEMENT ANALYSIS

There are various techniques available to analysts in

understanding and interpreting the financial statements of

a specific entity. Commonly used financial statement

ratio analysis and gross profit variation analysis.

HORIZONTAL ANALYSIS

In horizontal or comparative analysis, data from two or

more consecutive time periods are compared. The

difference between the figures of the two periods is

calculated and the percentage change from one period

to the next is computed using the earlier period as the

base. Horizontal analysis may also involve comparison

between the actual and budgets or two versions of

budgets.

% of change =

Base period value

considered:

A. If the base is zero or negative as in the case of

discounts on bonds payable, the percentage

change is not computed anymore.

B. Percentage changes and absolute amount

changes should both be considered in interpreting

the results of the analysis.

C. Comparative figures enhance analysis. It is better if

companies prepare comparative figures for a

period of longer than two years.

D. To highlight the trends in some important accounts,

long-term comparisons may be presented through

tables, graphs or charts.

E. Horizontal analysis of financial statements can also

be carried out by computing trend percentages.

Trend percentages state several years financial

data in terms of a base year. The base year equals

100%, with all other years stated as some

percentage of this base.

VERTICAL ANALYSIS

In vertical or common size analysis, figures in the financial

statements of a single period are compared by converting

them as a percentage of a common base. To accomplish

this, a common size or percentage composition statement

is prepared where all statement values are expressed as a

percentage of a base number which is set equal to 100%.

% of base value =

Base value

considered:

A. Normally, the base to be used is the net sales for

the income statement and total assets for the

statement of financial position.

B. Vertical analysis is more useful in comparing two

entities of differing size which first should be put in

equal standing by expressing their financial figures

into percentage and defining a common account

as base.

C. Vertical analysis gives additional information on

how the money coming from customers is

distributed among suppliers, employees, lessors,

creditors, government and owners.

RATIO ANALYSIS

In ratio analysis, one variable is selected as the numerator

while another variable is selected as the denominator to

show a relationship which can be expressed as a

percentage, a ratio or merely a number. In calculating

ratios, the following rules shall be observed:

A. Generally, when calculating a ratio, the amounts

for the numerator and the denominator must come

from the same statement.

B. If an income statement account and a statement

of financial position account are both used to

Page|1 of 7

position amount should be averaged for the time

period represented by the income statement

account.

C. If the beginning balance of the statement of

financial position account is not available, the

ending balance is normally used to represent the

average balance of the account.

D. If sales or purchases are given without making

distinction as to whether made in cash or on credit

assumptions are made depending on the ratio

being calculated. If turnover ratios, sales and

purchases are assumed to be made on credit. If

cash flow ratios, sales and purchases are assumed

to be made on cash.

There are several ratios that can be used for analysis.

However, these ratios can be grouped into four broad

categories depending needs of the users. Long-term

creditors are interested in ratios indicating the solvency of

the corporation while short-term creditors are more

interested in ratios indicating the liquidity of the firm.

Potential investors and stockholders, on the other hand, are

concerned with the firms profitability and the behavior of

its shares of stocks in the market.

Operating

Cycle

Average Age of

Receivables + Average

Age of Inventories

number of days to

convert the firms

inventories to cash

Working

Capital

Liabilities

liquidity in terms of

absolute peso amounts

Working

Capital

Turnover

Working Capital

of activity of working

capital

Asset Turnover

Assets

Measures the

effectiveness of asset

utilization in generating

revenue

Current Assets

Turnover

Taxes + Operating

Expenses excluding

Depreciation, Amortization

and Other Expenses

Related to Long-term

Assets) Average Current

Assets

Measures the

movement and

utilization of current

assets to meet the

operating requirements

of the firm

Fixed Assets

Turnover

Assets

Measures the

effectiveness of

utilization of fixed assets

in generating revenue

Liquidity Ratios

Leverage Ratios

pay its current obligation and continue operations. These

ratios answer the question:

leverage ratios provide information on the extent to which

borrowed or debt funds are used to finance assets. These

ratios are also a good way to assess the ability of the firm to

meet its debt payment obligations. These ratios are also

known as capital adequacy or solvency ratios. The ratios

answer the questions:

for cash from expected and unexpected sources?

TEST

FORMULA

SIGNIFICANCE

Current Ratio

(Working

Capital Ratio)

Liabilities

times that the current

liabilities could be paid

with the available

current assets

Quick Ratio

(Acid Test

Ratio)

Receivables

Turnover

Liabilities

Quick assets include cash

and cash equivalents,

marketable securities and

net receivables.

Trade Receivables

Average Age

of Receivables

(Average

Collection

Period)

Turnover

Merchandise

Inventory

Turnover

Cost of Sales

Average Merchandise

Inventory

Finished Goods

Turnover

Finished Goods Inventory

Goods In

Process

Turnover

Cost of Goods

Manufactured

Average Goods In Process

Inventory

Raw Materials

Turnover

Average Raw Materials

Inventory

ability to pay its shortterm debts from its most

liquid assets without

having to rely on

inventory.

Measures the time

required to complete

one collection cycle

from the time

receivables are

recorded, and then

collected to the time

new receivables are

recorded again.

Measures the average

number of days to

collect a receivable or

the average credit term

extended to customers

times that inventory is

replaced during the

period or the level of

inventory movement

during the year; for a

manufacturing firm, a

turnover ratio is

computed for each

type of inventories

Average Age

of Inventories

(Average

Conversion

Period)

Turnover Ratio

days inventory is kept in

company premises

whether for conversion

or in storage while

waiting to be sold

Payables

Turnover

Average Trade Payables

the firms payables

Average Age

of Payables

(Average

Payment

Period)

Turnover Ratio

time which trade

payables remain unpaid

and whether the firm

pays its invoices on time

shareholders against losses?

How little capital is necessary to allow shareholders to enjoy

maximum favorable returns on equity and dividends?

TEST

FORMULA

SIGNIFICANCE

Debt Ratio

Assets

share of creditors over

the total resources of

the firm

Equity Ratio

resources provided by

owners of the firm

Debt to Equity

Ratio

Equity

the debt is matched by

investment by owners.

Times Interest

Earned

and Taxes Interest

Expense

times interest expense is

covered by operating

profit

Equity

Multiplier

total investment can be

financed from ownerprovided equity

Profitability Ratios

Profitability ratios provide information on the ability of the

firm to generate earnings in relation to some base such

assets, sales or capital. The ratios answer the question:

Is net income adequate to satisfy investors dividend and rate of

return expectations and to support growth?

TEST

FORMULA

SIGNIFICANCE

Measures profit

generated after

consideration of cost of

goods sold which is

used to recover

operating expenses

Operating

Profit Margin

Measures profit

generated after

consideration of

operating costs and

cost of goods sold

Return on

Sales

Measures profit

percentage per peso

sales

Gross Profit

Margin

Page|2 of 7

Equity

return on resources

provided by owners

Return on

Assets

Assets

efficiency of the firm in

managing assets and

generating profits

regardless of how the

assets are financed

Earnings per

Share

Dividends) Average

Outstanding Ordinary

Shares

return on each ordinary

share which is indicative

of ability to pay

dividends

Cash Flow

Margin

Activities Net Sales

of the firm to translate

sales to cash

Return on

Equity

Important Notes:

A. If the intention is to measure operational

performance, income is expressed as before

interest and tax.

B. If the intention is to evaluate total managerial

effort, income is expressed after interest and

tax. The practice of expressing income after

interest but before tax is discouraged.

C. For return on asset calculation, income should

be before interest as it does not consider the

effect of the type of financing used.

D. Income should include dividends and interest

earned if the related investments are included

in the asset base.

E. If the DuPont model is used, income must be

after interest, tax and preferred dividends.

Growth Ratios

Growth ratios provide information of the organizations

potential and attractiveness as an option. The ratios answer

the question:

How do financial markets evaluate the financial condition of the

firm?

TEST

FORMULA

SIGNIFICANCE

Dividend Yield

Ratio

Market Value per Share of

Ordinary Shares

by shareholders from

dividends relative to

investment in stock

Dividend

Payout Ratio

Earnings per Share

Represents the

percentage of net

income distributed as

dividends

Price

Earnings Ratio

Ordinary Shares Earnings

per Share of Ordinary

Shares

period investment in

stock will be recovered;

measures investors

beliefs on the growth

potential of the stock

Understanding and interpreting calculated ratios may be

done through any of the following means:

A. Trend or time-series analysis uses ratios to

evaluate a firms performance over time.

B. Cross-section analysis uses ratios to compare

different companies at the same point in time.

C. Industry-comparative analysis used to compare

a firms ratios against average ratios for other

companies in the same industry.

GROSS PROFIT VARIATION ANALYSIS

Gross profit variation analysis is a detailed study on the

factors that caused the net change in gross profit. Changes

in gross profit may be attributed to the change in any or a

combination of the following factors:

A. Selling price(s) of the product(s).

B. Volume or quantity of product(s) sold: number of

physical units sold and product mix or sales mix

which refers to the composition of the products

sold.

C. Cost of the product sold: purchase cost of the

product for merchandising firms or manufacturing

factory overhead for manufacturing firms.

Sales variances:

Sales this year

Sales this year at sales prices last year

Sales price variance

P xxx

X xxx

P xxx

Sales last year

Sales volume variance

P xxx

X xxx

P xxx

Cost variances:

Cost of sales this year

Cost of sales this year at cost price last year

Cost price variance

Cost of sales this year at cost price last year

Cost of sales last year

Cost volume variance

P xxx

X xxx

P xxx

P xxx

X xxx

P xxx

Summary of Variances:

Sales price variance

Cost price variance

Net price variance

P xxx

X xxx

P xxx

Cost volume variance

Net volume variance

Gross profit variance

P xxx

X xxx

P xxx

P xxx

down into its sales mix and sales yield components:

Net volume variance:

Gross profit this year at last year's UGP

Gross profit this year at average UGP last year

Sales mix variance

P xxx

X xxx

P xxx

Gross profit last year

Sales yield or final sales volume variance

P xxx

X xxx

P xxx

Leverage refers the use of fixed cost assets or funds to

magnify returns to the firms owners. It is desirable as it

produces more earning power to owners. However,

leverage can also increase the risk exposure of firms.

A. Operating leverage the use of fixed operating

costs in a companys cost structure to enhance the

rate of return to equity owners. It is achieved by

increasing fixed costs while lowering variable costs.

The degree of operating leverage is used to

measure how sensitive profit before tax is to

percentage change in sales. It also is a measure of

operating or business risk, the risk associated with

projections of a firms future returns on assets or

returns on equity if the firm uses no debt.

Total contribution margin

Profit before tax

DOL =

Degree of OL =

B.

Percentage change in sales

refers to a companys use of borrowed funds and

fixed income securities to enhance the rate of

return to equity owners. Financial leverage is equal

to:

Return on equity Return on assets

There is positive financial leverage when the rate

earned on borrowed assets exceeds the rate paid

for the privilege of borrowing. There is a good use

of the borrowed funds and profits were earned

from its use (ROE > Interest rate).

There is negative financial leverage when the rate

earned on borrowed assets is less than the

borrowing rate. Simply put, the returns supposedly

generated from borrowings did not cover for the

interest charges of the borrowing (ROE < Interest

rate).

The degree of financial leverage is used to

measure the effects on earnings per share of

changes in profit before tax. It is also a measure of

financial risk, the additional risk placed on the

common stockholders as a result of the firms

decision to use debt.

Page|3 of 7

their size, nature and the business environment they

operate. As such, what is acceptable to one entity

may not be acceptable to another. Though

accountants are governed by GAAP, differences

might still be encountered because of variations in

the application of such principles.

B. Financial statements are prepared on an historical

cost basis and therefore do not reflect current

market value. Also, the gains or losses on

purchasing power are not reflected in the financial

statements.

C. The use of averages affect the ratios computed,

thereby, the analysis itself.

D. Most of the ratios used are merely approximations

and not accurate. The ratios computed themselves

are not conclusive and are not sufficient as a basis

to form judgments.

E. Financial statements do not show all the details

needed by external users in developing some

ratios.

F. Information gathered from the analysis of financial

statements is only a part of what is needed to

make good economic decisions.

Profit before tax Interest Preferred

dividends before tax

DFL =

Degree of O =

Percentage change in profit before tax

operating costs or financial costs, to enhance the

rate of return to equity owners.

The degree of total leverage measures the

combined effect of both operating leverage and

financial leverage. It is a measure of total risk.

Total contribution margin

Profit before tax Interest Preferred

dividends before tax

DTL =

Degree of O =

Percentage change in sales

Degree of O =

Degree of OL x Degree of FL

need for financial leverage.

LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

Some problems and limitations might be encountered in

analyzing financial statements. Analysts must be aware with

and guard against these problems.

ILLUSTRATIVE PROBLEMS

PROBLEM 1: Following are comparative

financial statements of Jasmine Corporation:

condensed

c.

d.

Jasmine Corporation

Statement of Financial Position

As of December 31

e.

Cash

Accounts receivable, net

Inventories

Fixed assets, net

Total assets

2013

P 7,500

11,000

20,500

34,410

P 73,410

2012

P 5,250

8,250

19,000

37,500

P 70,000

Current liabilities

Bonds payable, 10%

Common stock, P2.50 par

Retained earnings

Total equities

P 11,500

25,000

25,000

11,910

P 73,410

P 12,500

22,500

25,000

10,000

P 70,000

P6.25 /share

P8.75/share

Jasmine Corporation

Statement of Income and Retained Earnings

For the Year Ended December 31

Sales

Cost of goods sold

Gross margin

Operating expenses

Interest expense

Income before taxes

Income taxes

Net income after tax

Retained earnings, 1/1

Total

Dividends paid

Retained earnings, 12/31

2013

P 100,000

61,250

P 38,750

(26,000)

(2,500)

P 10,250

3,590

P

6,660

10,000

P 16,660

4,750

P 11,910

2012

P 97,500

55,000

P 42,500

(26,250)

(2,250)

P 14,000

4,900

P

9,100

4,750

P 13,850

3,850

P 10,000

P3,000.

Requirements:

1. Perform a horizontal analysis of Jasmines financial

statements. Show the increases and decreases in

each account in absolute peso values and

percentages.

2. Perform a vertical analysis on the financial statements

of Jasmines financial statements.

3. Using the data on the financial statements, perform a

ratio analysis by calculating the following ratios as of

and for 2013:

a. Working capital ratio, current ratio and quick

ratio (acid test ratio).

b. Receivables turnover and average collection

period.

f.

g.

h.

i.

j.

k.

period.

Payables turnover and average payment

period.

Operating cycle and cash conversion cycle in

days.

Asset turnover and working capital turnover.

Debt ratio, equity ratio and debt-equity ratio,

equity multiplier and times interest earned.

Gross profit margin, operating profit margin

and cash flow margin.

Return on sales, return on assets and return on

equity.

Earnings per share (EPS) and price-earnings

(P/E) ratio.

Dividend yield, dividend payout and plowback

ratio.

have been reported as follows over the last four years (in

thousands):

Sales

Cash

Accounts receivable

Inventory

Prepaid expenses

Year 4

P 800

35

75

78

47

Year 3

P700

30

50

75

39

Year 2

P600

24

58

80

11

Year 1

P 570

18

45

75

25

Requirements:

1.

2.

or percentages using Year 1 as base year.

Express all the sales and current assets on trend index

or percentages using Year 3 as base year.

fairness of the relationships among current financial data

against those of prior financial information. Given

established financial relationship and key amounts, a CPA

could also prepare projected financial statements. June

Sales Corporation has in recent prior years maintained the

following relationships among the data on its financial

statements:

Net income rate on net sales

Gross income rate on net sales

Ratio of selling expense to net sales

Acid test ratio

Current ratio

Accounts receivable turnover

Inventory turnover

Composition of quick assets:

Cash

Marketable securities

Accounts receivable

5 per cent

35 per cent

15 per cent

2 to 1

3 to 1

5 times

5 times

10 per cent

30 per cent

60 per cent

Page|4 of 7

Asset turnover

Ratio of total assets to intangible assets

Ratio of accounts receivable to accounts

payable

Ratio of working capital to shareholders

equity

Ratio of total liabilities to stockholders equity

Ratio of accumulated depreciation to cost of

fixed assets

Number of times interest earned

1 per year

20 to 1

1.5 to 1

1 to 1.6

1.4 to 1.6

1 to 3

2 times

P150,000 which will result in earnings per share of P10 per

share of common stock. Additional information includes the

following:

A. Common stock has a par value of P50 per share

and was issued at 20% premium.

B. 8% preferred stock has a par value of P50 per share

and was issued at 10% premium.

C. Preferred dividends paid in 2012 was P10,000. The

same amount will be paid in 2013.

D. The companys purchases and sales are all on

account.

For projection purposes, it is assumed that the above

relationships among the data on the financial statement of

June Sales Corporation shall also hold true for 2013.

Requirements:

1.

2.

the year 2013. Ignore income tax.

Prepare a projected income statement for the year

ended December 31, 2013. Ignore income tax.

following ratios provided by its accountant:

Acid test ratio

Times interest earned

Gross margin ratio

Inventory turnover

Debt to equity ratio

Ratio of operating expenses to sales

1.2 to 1

8 times

40%

6 times

0.9 to 1

15%

P900,000. Gross margin for 2013 amounted to P600,000.

Beginning balance of merchandise inventory was P200,000.

The companys long-term liabilities consisted of bonds

payable with interest of 15%. You decided to reconstruct

the companys financial statements based on the limited

information given to serve as basis for further analysis.

Requirements:

1.

2.

3.

What was the total of bonds payable as of

December 31, 2013?

What is the working capital of Joaquin as of

December 31, 2013?

Company is preparing its plans for the year 2013. The

average assets to be employed for the year are estimated

at P2,600,000 with 20% of this amount borrowed at no

interest cost. Materials and labor cost for the year is

budgeted at P4,000,000 while operating cost is estimated

at P1,500,000. All sales are to be billed at 162.5% of

materials and labor cost. Income tax rate is at an average

of 35% of income before income tax.

Requirements:

1.

2.

3.

expected asset turnover for 2013?

What is the estimated rate of return on average total

assets for 2013?

What is the estimated rate of return on stockholders

equity for 2013?

situation below using only the information given:

Case A: Payout ratio

40%

Earnings per share

P 50.00

Price-earnings ratio

4 to 1

Market price per share

?

Dividend per share

?

Yield rate

?

Stockholders equity

Return on assets

Return on shareholders equity

Case C: Return on equity

Debt ratio

Return on assets

Case D: Market price per share

Price-earnings ratio

Net income

Common stock outstanding

Case E: Total assets

Ordinary shares outstanding

Preference shares outstanding

Net income

Depreciation expense

Cash flow to total liabilities

Case F: Return on asset

Asset turnover

Profit margin ratio

Case G: Current assets

Inventory

Quick ratio

Current liabilities

Case H: Total assets, beginning

Net income for the year

Dividends paid during the year

Internal growth rate

Case I: Net purchases (all on account)

Cost of goods sold

Ending inventory

Net sales (10% on cash)

Beginning accounts receivable

Collections on accounts

Operating cycle

Case J: Sales

Bond interest expense

Income taxes

Net income

Times interest earned

Case K: Asset turnover

Return on assets

Return on equity

Debt ratio

Equity multiplier

60%

P 120 million

9%

?

12%

40%

?

P

120.00

4 times

P 1.5 million

?

P 5 million

2.5 million

1 million

P 750,000

500,000

?

24%

1.6 times

?

P

200,000

80,000

2 to 1

?

P 500,000

30,000

10,000

?

P 960,000

900,000

180,000

1.3 million

80,000

1.1 million

?

P 1.8 million

60,000

300,000

400,000

?

1.5 times

3%

5%

?

?

Embargo Company accounting records:

A. Cash account balance is P43,000 on January 1,

2013 and P18,000 on December 31, 2013.

B. The balance in accounts receivable decreased by

P10,000 during the year from P60,000. The company

had no short-term investments.

C. Accounts payable increased P3,000 during the

year to P32,000. Income tax payable increased

P4,000 during the year to P8,000. Wages payable

decreased by P5,000 to P4,000. There were no

other current liabilities.

D. The companys inventory increased by P9,000 to

P80,000.

E. During December 2013, the company settled a

P10,000 note payable by issuing shares of its own

capital with equivalent value.

F. Sale of some old operational assets resulted in the

following entry:

Cash

Accumulated depreciation

Operational assets

Gain on sale of assets

P 5,000

12,000

P 15,000

2,000

Payment of long-term debts, P64,000.

Purchase of new operational assets, P74,000.

Payment of cash dividend, P16,000.

Purchase of land as an investment, P25,000.

H. Sale and issuance of Embargo Company capital

stock for P20,000 cash.

I. Issuance of long-term mortgage note, P30,000.

Page|5 of 7

J.

K.

P1,000,000.

Income statement data for the year 2013 follows:

Sales, net

Cost of goods sold

Depreciation expense

Patent amortization

Income tax expense

Selling and administrative expenses

Gain on sale of operational assets

Net income

295,000

(140,000)

(14,000)

(1,000)

(17,000)

(42,000)

2,000

P

83,000

2.

3.

Requirements:

1. Compute for the current and quick ratio, working

capital to total assets ratio.

2. Compute for the accounts receivable turnover and

inventory turnover.

3. Compute for the age of accounts receivable and

age of inventory.

4. Compute for the working capital turnover and profit

margin on sales.

5. Compute for the net cash flow to current liabilities

and dividend payout ratio.

PROBLEM 8: Provide for what is asked by each independent

situation below.

A. Related Ventures has a total asset turnover of 0.30

and a profit margin of 10%. The president is

unhappy with the current return on assets and he

thinks it could be doubled. This could be

accomplished by increasing the profit margin to

15% and increasing the total assets turnover. What

new asset turnover ratio, along with the 15% profit

margin, is required to double the return on assets?

B. Linked Company has a debt ratio of 0.50, a total

assets turnover of 0.25 and a profit margin of 10%.

The president is unhappy with the current return on

equity and he thinks it could be doubled. This could

be accomplished by increasing the profit margin to

14% and by increasing debt utilization. Total assets

turnover will not change. What new debt ratio,

along with the 14% profit margin, is required to

double the return on equity?

C. Associated Corporation paid out of its 2012

earnings by dividends. Its earnings increased by

20% and the amounts of its dividends increased by

15% in 2013. What was Associateds dividend

payout ratio in 2013?

D. It is the policy of Attached Corporation that the

current ratio cannot fall below 1.5 to 1.0. Its current

liabilities are P400,000 and the present current ratio

is 2.0 to 1.0. How much is the maximum level of new

short-term loans it can secure without violating the

policy?

E. As of the end of 2012, Connected Company had

total assets of P375,000 and equity of P206,250. For

2013, its budget for capital investment projects is

P62,500. To finance a portion of the capital budget,

the company may borrow from a bank which set a

condition that the loan would be approved,

provided that the 2013s debt to equity ratio should

be the same as that of 2013. How much debt

should be incurred to satisfy the banks condition?

PROBLEM 9: Sta. Maria Company produces and sells cellular

phone blaster, a gadget which explodes when activated

with a remote commander. This is used by cell phone

owners when their unit is snatched from them or is taken by

thieves. The static master budget and the actual results of

operations for the month of June are as follows:

Budget

Actual

Sales

P 800,000

P 1,056,000

Cost of goods sold

480,000

556,800

Gross profit

P 320,000

P 499,200

Management wants an explanation of the favorable gross

profit variance of P179,200.

Requirements:

1. Compute for the sales price and sales volume

variances.

variances.

Determine the percentage changes in volume, in

sales price and cost price.

asks you to prepare an analysis of the gross profit variance

based on their comparative income statements for 2012

and 2013:

2013

2012

Sales

P 990,000

P 800,000

Cost of goods sold

760,000

640,000

Gross profit

P 230,000

P 160,000

The only known information given to you is that volume

increased from 2012 to 2013 by 10%.

Requirements:

1.

2.

3.

4.

variances.

Determine the cost price and cost volume variances.

What are the percentage changes in sales price and

cost price?

What is the variance in gross profit due to change in

volume?

year 2012 and 2013 are as follows:

2013

2012

Sales

P 276,000

P 204,000

Cost of goods sold

151,800

122,400

Gross profit

P 124,200

P 81,600

The sales price in 2013 is approximately 20% higher than the

sales price in 2012.

Requirements:

1.

2.

3.

variances.

Compute for the cost price and cost volume

variances.

Determine the percentage changes in cost price

and volume.

PROBLEM 12: The gross profit statements for 2013 and 2012

of Mimi Company follow:

2013

2012

Sales

P 160,000

P 120,000

Cost of goods sold

120,000

72,000

Gross profit

P

40,000

P 48,000

Mimi Company informed you that the unit cost decreased

by 20% at the start of 2013.

Requirements:

1.

2.

3.

variances.

Determine the cost price and cost volume variances.

Determine the percentage changes in sales price

and volume.

products. Sales and other information pertaining to the

three products are as follows:

2013

Tic

Tac

Toc

Sales

P 120,000 P 128,000 P 24,000

Cost of goods sold

96,000

112,000

18,000

Gross profit

P 24,000 P 16,000 P 6,000

2012

Sales

Cost of goods sold

Gross profit

Tic

P 192,000

144,000

P 48,000

Tac

P 144,000

120,000

P 24,000

Toc

P 16,000

12,800

P 3,200

Requirements:

1.

2.

3.

4.

variances?

What are the cost price and cost volume variances?

What are the net gross profit price and net gross

profit volume variances?

What are the sales mix and the final sales volume

variances?

Page|6 of 7

Annabelle Corporation for the year ended December 31,

2012:

Annabelle Corporation

Income Statement

For the Year Ended December 31, 2012

Sales (P100 each)

P 50,000,000

Less: Variable costs (P80 each)

40,000,000

Contribution margin

P 10,000,000

Less: Fixed costs

6,000,000

Operating income

P

4,000,000

Less: Interest expense

1,000,000

Income before tax

P

3,000,000

Less: Income tax (30%)

900,000

Income after tax

P

2,100,000

preferred shareholders in the amount of P700,000.

Annabelle Corporations earnings per share for 2012 is P5.00

per share.

Requirements:

1.

2.

3.

operating leverage, degree of financial leverage

and degree of total leverage.

If Annabelle expects its EPS to increase to P5.50 in

2013 with all other variables constant, what is the

expected sales and operating income in 2013?

If Annabelle did not have preferred shares, what will

happen to its degree of total leverage, degree of

financial leverage and degree of operating

leverage?

Page|7 of 7

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