FINANCIAL RATIO ANALYSIS

1. Which of the following is true about the impact of price inflation on financial ratio
analysis?

a. Inflation has no impact on financial ration analysis

b. Inflation affects financial ratio analysis for one enterprise over time but not
comparative analysis of enterprises of different pages.
c. Inflation affects financial ratio analysis for one enterprise overtime, as well as
comparative analysis of enterprises of different ages.
d. Inflation affects comparative analysis of enterprises of different ages but not
financial ratio analysis for enterprise over time

2. When using common size statements

a. Data may be selected for the same business as of different dates, or for two or
more business as of the same date.
b. relationships should be stated in term of ratios
c. peso changes are reported over a period of at least three years
d. All of the above are correct

3. A useful tool in financial statement analysis is the common-size financial statements.

What does this tool enable the financial analyst to do?

a. Evaluate financial statements of companies within a given industry of

approximately the same value.
b. Determine which companies in the same industry are at approximately the same
stage of development.
c. Compare the mix of assets, liabilities, capital, revenue and expenses within a
company over time or between companies within a given industry without respect
to relative size.
d. Ascertain the relative potential of companies of similar size in different industries.

4. Which of the following financial statements best describes the use of financial
statement analysis?

a. Financial statement analysis techniques are merely guides to interpretation of

financial data.
b. Financial statement analysis can eliminate the risk in investment decision.
c. Measurements for a specific company should be compared only with data from
past periods.
d. All of the above are correct.
5. In comparing the current ratios of two companies, why is it invalid to assume that the
company with the higher current ratio is better company?

a. The current ratio includes assets other than cash.

b. A high current ratio may indicate inadequate inventory on hand.
c. A high current ratio may indicate inefficient use of various assets and liabilities.
d. the two companies may define working capital in different terms.

6. Kairus Corporation had a current ratio of 2.0 at the end of 2007. Current assets and
current liabilities increased by equal amounts during 2008. The effects on net working
capital and on the current ratio, respectively, were,
a. no effect, increase
b. increase, increase
c. no affect, decrease
d. decrease, decrease

7. Which of the following ratios does not measure liquidity?

a. Net cash flow to current liabilities
b. Current ratio
c. Working capital to total assets
d. Quick ratio

8. Pulse Company wrote off a P800 uncollectible account receivable against the
allowance for doubtful accounts with a balance of P 2,100. The current ratio after the
write off of the uncollectible accounts
a. would be less than before the write-off of the account.
b. would be greater than before the write off of the account.
c. would be the same as before the write off the account.
d. cannot be determined with the information given.

9. How would the quick ratio be affected by a prepayment of P 30,000 for fire and
liability insurance?

a. The quick ratio would increase.

b. The quick ratio would decrease.
c. The quick ratio would change.
d. The effect cannot be determined from the information given.

10. Which of the following is true regarding the debt to equity ratio?
a. The debt equity ratio is a stringent measure of liquidity
b. The debt to equity ratio measures the productivity and desirability of the equity
investment.
c. The debt to equity ratio measures the management’s ability to productively
employ all its resources.
d. The debt to equity ratio measures the capital structure of the entity.
11. Which of the following is not correct regarding the rate of return on assets?
a. The rate of return of assets measures management’s ability to productively
employ all its resources.
b. The rate of return on assets measures all the return on all assets used regardless of
how the assets are financed.
c. The rate of return on assets is a measure of profitability.
d. The rate of return on assets measures the rate of return on the investment made by
the owners of the entity.

12. Which of the following ratios would not be affected by the choice of depreciation
method.
a. Price-earning ratio
b. Debt to equity ratio
c. Earning per share of common stock
d. Working capital turnover

13. Expenses per peso of sales are indications of

a. Operating efficiency
b. Operating ratio
c. Equity ratio
d. leverage

14. A high inventory turnover indicates that

a. A relatively big amount of inventory is being carried in relation to sales
b. a relatively small amount of inventory is being carried in relation to sales
c. Slow moving or obsolete goods are included in the inventory
d. Answer not given

15. A firm financial risk is a function of how it manages and maintains its debt. Which
one of the following sets of ratios characterizes the enterprise with greatest amount of
financial risk?
a. High debt-to-equity ratio, high interest coverage ratio, stable return on equity.
b. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity.
c. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity.
d. Low debt-to-equity ratio, high interest coverage ratio, stable return on equity

16. Which of these ratios are measures of a company’s profitability?

1. Earnings per share 5. Return on assets
2. Current ratio 6. Inventory turnover
3. Returns on sales 7. Receivables turnover
4. Debt-equity ratio 8. Price-earning ratio

a. All eight ratios. c. 1,3,5,6,7 and 8 only

b. 1,3,5, and 8 only d. 1,3 and 6 only
17. Return on investment may be calculated by multiplying total assets turnover by
a. Average collection period. c. Debt ratio
b. Profit margins d. Fixed-change coverage

18. A service company’s working capital at the beginning of January of the current year
was P70,000. The following transactions occurred during January.
Performed services on account P 30,000
Purchased supplies on account 5,000
Consumed supplies 4,000
Purchase office equipment for cash 2,000
Paid short-term bank loan 6,500
Paid salaries 10,000
Accrued salaries 3,500

What amount of working capital at the end of January?

a. P 90,000 b. P80,500 c. P.50,000 d. P47,500

19. Dana Corporation’s books disclosed the following information for the year ended
December 31, 2008:

Net credit sales P 1,500,000

Net cash sales 240,000
Accounts receivables at beginning of year 200,000
Accounts receivables at end of year 400,000
Dana’s account receivable turnover is
a. 3.75 times. b. 4.35 times c. 5.00 times d. 5.80 times

20. Selected information from the accounting records of Thorne Company is as follows:
Net sales for 2008 P 900,000
Cost of goods sold for 2008 600,000
Inventory at December 31, 2007 180,000
Inventory at December 31, 2008 156,000
Thone’s inventory turnover for 2008 is
a. 5.36 times b. 3.85 times c. 3.67 times d. 3.57 times

21. Selected information from the accounting records of the Vasaar Company is as
follows:
Net accounts receivables at December 31, 2007 P 900,000
Net accounts receivables at December 31, 2008 1,000,000
Accounts receivables turnover 5 to 1
Inventories at December 31, 2007 P1,100,000
Inventories at December 31, 2008 1,200,000
Inventory turnover 4 to 1
What was Vasaar’s gross margin for 2008?
a. P 150,000 b. P 200,000 c. P 400,000 d. P 500,000
22. The following data were abstracted from the records of Johnson Corporation for the
year:
Sales P 1,800,000
Bond interest expense 60,000
Income taxes 300,000
Net Income 400,000
How many times was bond interest earned?
a. 7.67 b. 11.67 c. 12.67 d. 13.67

23. Selected information for Henry Company is as follows:

December 31
2007 2008
Common stock P 600,000 P 600,000
Additional paid-in capital 250,000 250,000
Retained earnings 170,000 370,000
Net income for year 120,000 240,000
Henry’s return on common stockholders equity, rounded to the nearest percentage point
for 2008 is
a. 20 percent b. 21 percent c. 28 percent d. 40 percent

24. Selected information from the accounting records of Ellison Manufacturing as

follows:
Net sales P3,600,000
Cost of goods sold 2,400,000
Inventories as January 1 672,000
Inventories at December 31 576,000
What is the number of day’s sales in average inventories for the year?
a. 102.2 b. 94.9 c. 87.6 d.68.1

25. Orchard Corporation’s capital stock at December 31 consisted of the following: (a)
Common stock, P2 par value; 100,000 shares authorized, issued and outstanding. (b) 10%
non-cumulative, nonconvertible preferred stock, P100 par value, 1,000 shares authorized,
issued and outstanding.

Orchards common stock, which is listed on 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. The yearly preferred dividend was declared. No capital stock transactions
occurred. What was the price-earning ratio on Orchards common stock at December 31?

a. 6 to 1 b. 8 to 1 c. 10 to 1 d. 16 to 1
26. Selected financial data of Kairen Corporation for the year ended December 31, 2008
is presented below:

Operating income P 900,000

Interest expense (100,000)
Income before income tax 800,000
Income tax expense (320,000)
Net Income 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders P 280,000

Common stock dividends were P 120,000. The times interest earned ratio is:
a. 2.8 to 1 b. 4.8 to 1 c. 6.0 to 1 d. 9.0 to 1

27. During the year, the Grap Company purchased 1,920,000 of inventory. The cost of
goods sold for the year was P 1,800,000 and the ending inventory at December 31 was
P360,000. What was the inventory turnover for the year?

a. 5.0 b. 5.3 c. 6.0 d. 6.4

28. On December 31, 2007 and 2008. Taft Corporation had 100,000 shares of common
stock and 50,000 shares of non cumulative and nonconvertible preferred stock issued and
outstanding. Additional information:

Stockholders equity at 12/31/2008 P 4,500,000

Net income year ended 12/31/2008 1,200,000
Dividends on preferred stock year ended 12/31/2008 300,000
Market Price per share of common stock at 12/31/2008 144
The price-earning ratio on common stock at December 31, 2008 was
a. 10 to 1 b. 12 to 1 c. 14 to 1 d. 16 to 1

29. Alumbat Corporation has P800,000 of debt outstanding and it pays an interest rate of
10% on its bank loan. Alumbat’s annual sales are P 3,200,000 its average tax rate is 40%,
and its net profit margin on sale is 6%. If the company does not maintain a TIE ratio of
atleast 4 times, its bank will refuse to renew its loan and bankruptcy will result. What is
Alumbat’s current TIE ratio?
a. 3.4 b. 3.6 c. 4.0 d. 5.0

30. Last year’s asset turnover ratio for Wuerful Airlines was 2.5.This year sales increased
by 20% and average total assets increased by 10%. What is the current asset turnover
ratio?
a. 2.50 b. 2.59 c. 2.73 d. 3.00
31. The Wilson Corporation has the following relationships
Sales/Total assets 2.0
Return on Assets (ROA) 4%
Return on Equity (ROE) 6%
What is Wilson’s profit margin and debt equity ratio?
a. 2%; 0.33 b. 4%; 0.33 c. 4%; 0.67 d. 2%.0.67

32. Lombartidi Trucking Company has the following data:

Assets: P10,000 Profit Margin: 3.0% Tax rate: 40%
Debt Ratio: 60.0% Interest rate: 10.0% Total assets turnover 2.0
What is Lombartidi’s TIE ratio
a. 0.95 b. 1.75 c. 2.10 d. 2.67

33. The equity section of Jones Corporation’s statement of financial position is presented
below
Preferred stock, 6%, P100 par P 40,000,000
Common stock, P4 par 10,000,000
Additional paid-in capital 20,000,000
Retained earnings 10,000,000
Equity P 80,000,000

The preferred stock is cumulative and nonparticipating. All preferred dividends have been
paid and liquidation value is P110 per preferred share. What is the book value per share
of Jones Corporation common stock?

a. P100 b. P 16 c. P 14.40 d. P4

34. Deb & Co. has a debt ratio of 0.50, a total assets turnover of 0.25 and an 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 (1) by increasing the profit margin to 14% and
(2) 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.

a. 0.75 b. 0.70 c. 0.65 d. 0.55

Question 35 and 36 are based on the following information.

The Dawson Corporation projects the following for the year 2005.
Earnings before interest and taxes P 35,000,000
Interest expense P 5,000,000
Preferred stock dividends P 4,000,000
Common stock dividends payout ratio 30%
Common shares outstanding 2 million
Effective corporate income tax 40%

35. The expected common stock dividend per share by Dawson Corporation for 2005 is
a. P2.34 b. P2.70 c. P1.80 d. P2.10
36. If Dawson Corporation’s common stock is expected to trade at a price-earning ratio of
eight, the market price per share (to the nearest peso) should be
a. P 104 b. P 56 c. P72 d. P68

37. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm
experienced P2 million in sales and sustains an inventory turnover of 8.0, what are the
firms current assets?
a. 1 million b. P500,000 c. P1,500,000 d. P1,250,000

38. Last year’s asset turnover ratio for Wueffel Airlines was 2.5.This year sales increased
by 20% and average total assets increased by 10%. What is the new asset turnover ratio?
a. 2.50 b. 2.59 c. 2.73 d. 3.00

39.Using the data presented below, calculate the cost of sales for the Beta Corporation for
the year just ended.
Current ratio 3.5
Acid Test ratio 3.0
Current liabilities at year end P 600,000
Beginning inventory P 500,000
Inventory Turnover 8.0

a. P1,600,000 b. P2,400,000 c. P 3,200,000 d. P4,600,000

40. JC Goods, Inc. has a total assets 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 (1) by increasing the profit margin to 15% and (2) by
increasing total assets turnover. What new asset turnover ratio along with the 15% profit
margin is required to double the return on assets?
a. 35% b. 45% c. 40% d. 50%