Financial Statement Analysis

Financial Statement Analysis
ratios Horizontal analysis

Interested parties 8. The percentage analysis of increases and decreases in individual items in comparative
50. Long-term creditors are usually most interested in evaluating financial statements is called:
A. liquidity. C. profitability. A. vertical analysis C. profitability analysis
B. marketability. D. solvency. B. solvency analysis D. horizontal analysis
Financial Leverage 11. Horizontal analysis is also known as

45. Trading on the equity (leverage) refers to the A. linear analysis. C. trend analysis.
MODULE 10 B. vertical analysis. D. common size analysis.
FINANCIAL STATEMENT ANALYSIS 13. In which of the following cases may a percentage change be computed?
A. The trend of the amounts is decreasing but all amounts are positive.
THEORIES: any one industry. B. There is no amount in the base year.
C. There is a negative amount in the base year and a negative amount in the subsequent
Common-sized financial statements year.
9. Which of the following generally is the most useful in analyzing companies of different sizes? D. There is a negative amount in the base year and a positive amount in the subsequent
A. comparative statements C. price-level accounting year.
B. common-sized financial statements D. profitability index
14. Horizontal analysis is a technique for evaluating a series of financial statement data over a
12. Statements in which all items are expressed only in relative terms (percentages of a base) are period of time
termed: A. that has been arranged from the highest number to the lowest number.
A. Vertical statements C. Funds Statements B. that has been arranged from the lowest number to the highest number.
B. Horizontal Statements D. Common-Size Statements C. to determine which items are in error.
D. to determine the amount and/or percentage increase or decrease that has taken place.
10. The percent of property, plant and equipment to total assets is an example of:
A. vertical analysis C. profitability analysis A. instead of horizontal and vertical analyses.
B. solvency analysis D. horizontal analysis B. because they can provide information that may not be apparent from inspection of the
individual components of a particular ratio.
15. Vertical analysis is a technique that expresses each item in a financial statement C. because even single ratios by themselves are quite B. should be smaller than return on
A. in pesos and centavos. sales
B. as a percent of the item in the previous year. C. can be affected by the company’s choice of a depreciation method
C. as a percent of a base amount. D. should be larger than return on equity
D. starting with the highest value down to the lowest value.
Return on investments
17. In performing a vertical analysis, the base for prepaid expenses is 72. Return on investment measures:
A. total current assets. C. total liabilities. A. return to all suppliers of funds C. return to all long-term suppliers of funds
B. total assets. D. prepaid expenses in a previous year. B. return to all long-term creditors D. return to stockholders
567
Market test ratios D. a rise in total asset turnover

Price-earnings ratio
56. The price/earnings ratio 89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an
A. measures the past earning ability of the firm average quick ratio, and a low inventory turnover. What might you assume about Tri-C?
B. is a gauge of future earning power as seen by investors A. Its cash balance is too low. C. Its current liabilities are too low.
C. relates price to dividends B. Its cost of goods sold is too low. D. Its average inventory is too high.
D. relates
Current ratio
58. Which of the following ratios usually reflects investors opinions of the future prospects for the 33. Which of the following would be most detrimental to a firm's current ratio if that ratio is
firm? currently 2.0?
A. dividend yield C. book value per share A. Buy raw materials on credit
B. price/earnings ratio D. earnings per share B. Sell marketable securities at cost
C. Pay off accounts payable with cash
Dividend yield D. Pay off a portion of long-term debt with cash
57. Which of the following ratios represents dividends per common share in relation to market
price per common share? Fixed asset turnover ratio
A. dividend payout C. price/earnings 68. Which of the following circumstances will cause sales to fixed assets to be abnormally high?
B. dividend yield D. book value per share A. A labor-intensive industry.
B. The use of units-of-production depreciation.
Financial Statement Analysis C. A highly mechanized facility.
Accounts Receivable D. High direct labor costs from a new union contract.
26. Which of the following reasons should not be considered in order to explain why the
receivables appear to be abnormally high? Total asset turnover
A. Sales volume decreases materially late in the year. 81. A firm with a total asset turnover lower than the industry standard and a current ratio which
B. Receivables have collectibility problems and possibly some should have been written off. meets industry standard might have excessive:
C. Material amount of receivables are on the installment basis. A. Accounts receivable C. Debt
D. Sales volume expanded materially late in the year. B. Fixed assets D. Inventory
31. An acceleration in the collection of receivables will tend to cause the accounts receivable Profitability analysis
turnover to: 84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
A. decrease C. either increase or decrease P2,500,000. Which of the following best compares the profitability of Denver and Oakland?
B. remain the same D. increase A. Oakland Enterprises is 25% more profitable than Denver Dynamics.
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't
Inventories be quantified.
32. Which of the following would best indicate that the firm is carrying excess inventory? C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics.
A. a decline in the current ratio D. Further information is needed for a reasonable comparison.
B. stable current ratio with declining quick ratios
C. a decline in days' sales in inventory Debt ratio
568
86. Companies A and B are in the same industry and have similar characteristics except that 88. Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
Company A is more leveraged than Company B. Both companies have the same income A. Convert marketable securities to cash.
before interest and taxes and the same total assets. Based on this information we could B. Pay accounts payable with cash.
conclude that C. Buy inventory with short term credit (i.e. accounts payable).
A. Company A has higher net income than Company B D. Sell inventory at cost.
B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B. Acid-test ratio
D. Company A has a lower debt ratio than company B 38. If a company has an acid-test ratio of 1.2:1, what respective effects will the
borrowing of cash by short-term debt and collection of accounts receivable
Sensitivity Analysis have on the ratio?
Current ratio A. B. C. D.
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
Short-term borrowing Increase Increase Decrease Decrease
A. improve its collection practices, thereby increasing cash and increasing its current and
Collection of receivable No effect Increase No effect Decrease
quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current
Profit margin
liabilities and increasing the current and quick ratios.
C. decrease current liabilities by utilizing more long-term debt, thereby increasing the 70. Which of the following would most likely cause a rise in net profit margin?
A. increased sales C. decreased operating expenses
current and quick ratios.
D. increase inventory, thereby increasing current assets and the current and quick ratios. B. decreased preferred dividends D. increased cost of sales
43. Recently the M&M Company has been having problems. As a result, its financial situation has Return on assets
deteriorated. M&M approached the First National Bank for a badly needed loan, but the loan 67. Return on assets cannot fall under which of the following circumstances?
officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank A. B. C. D.
would even consider granting the credit. Which of the following actions would do the most to Net profit margin Decline Rise Rise Decline
improve the ratio in the short run? Total asset turnover Rise Decline Rise Decline
A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable. Debt ratio
C. Paying off some long-term debt. 83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor,
D. Purchasing additional inventory on credit (accounts payable). has long-term debt of P200,000. Which of the following statements best represents an
analysis of the long-term debt position of these two firms?
87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before A. Jones obviously has too much debt when compared to its competitor.
borrowing P60,000 from the bank with a 3-month note payable. What effect did the B. Smith Company's times interest earned should be lower than Jones.
borrowing transaction have on Tyner Company's current ratio? C. Smith has five times better long-term borrowing ability than Jones.
A. The ratio remained unchanged. D. Not enough information to determine if any of the answers are correct.
B. The change in the current ratio cannot be determined.
C. The ratio decreased. Times interest earned
D. The ratio increased. 85. Which of the following will not cause times interest earned to drop? Assume no other changes
than those listed.
569
A. A rise in preferred stock dividends. Notes payable, due in six months 250,000
B. A drop in sales with no change in interest expense. What will happen to the ratios below if Ratio Company uses cash to pay 50 percent
C. An increase in interest rates. of its accounts payable?
D. An increase in bonds payable with no change in operating income. A. B. C. D.
Current ratio Increase Decrease Increase Decrease
DuPont Analysis Acid-test ratio Increase Decrease Decrease Increase
71. Which of the following could cause return on assets to decline when net profit margin is
increasing? Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad
A. sale of investments at year-end C. purchase of a new building at year-end Company at the end of the current year:
B. increased turnover of operating assets D. a stock split Accounts payable P145,000
Accounts receivable 110,000
80. A firm with a lower net profit margin can improve its return on total assets by Accrued liabilities 4,000
A. increasing its debt ratio C. increasing its total asset turnover Cash 80,000
B. decreasing its fixed assets turnover D. decreasing its total asset turnover Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
PROBLEMS: Notes payable, short-term 85,000
Horizontal analysis Prepaid expenses 15,000
i
. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as
the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in iv
. The amount of working capital for the company is:
2008. The respective net income reported by Kline Corporation for 2007 and 2008 are: A. P351,000 C. P211,000
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 B. P361,000 D. P336,000
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
v
ii
. The company’s current ratio as of the balance sheet date is:
. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in A. 2.67:1 C. 2.02:1
2007. The increase in net income of P300,000: B. 2.44:1 D. 1.95:1
A. can be stated as 0% C. cannot be stated as a percentage
B. can be stated as 100% increase D. can be stated as 200% increase vi
. The company’s acid-test ratio as of the balance sheet date is:
A. 1.80:1 C. 2.02:1
Liquidity ratios B. 2.40:1 D. 1.76:1
iii
. The following financial data have been taken from the records of Ratio Company:
Accounts receivable P200,000 Activity ratios
Accounts payable 80,000 Receivables turnover
Bonds payable, due in 10 years 500,000 vii
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of
Cash 100,000 P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the
Interest payable, due in three months 25,000 year were P600,000 and P700,000, respectively. The receivables turnover was
Inventory 440,000 A. 7.7 times. C. 9.3 times.
Land 800,000 B. 10.8 times. D. 10.0 times.
570
Petals’ inventory turnover for 2007 is

viii
. Milward Corporation’s books disclosed the following information for the year ended December A. 5.77 times C. 3.67 times
31, 2007: B. 3.85 times D. 3.57 times
Net credit sales P1,500,000
Net cash sales 240,000 xiii
. The Moss Company presents the following data for 2007.
Accounts receivable at beginning of year 200,000 Net Sales, 2007 P3,007,124
Accounts receivable at end of year 400,000 Net Sales, 2006 P 930,247
Milward’s accounts receivable turnover is Cost of Goods Sold, 2007 P2,000,326
A. 3.75 times C. 5.00 times Cost of Goods Sold, 2007 P1,000,120
B. 4.35 times D. 5.80 times Inventory, beginning of 2007 P 341,169
Inventory, end of 2007 P 376,526
Days receivable The merchandise inventory turnover for 2007 is:
ix
. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the A. 5.6 C. 7.5
beginning of the year and a balance of P410,000 at the end of the year. The net credit sales B. 15.6 D. 7.7
during the year amounted to P4,000,000. Using 360-day year, what is the average collection
period of the receivables? xiv
. Based on the following data for the current year, what is the inventory turnover?
A. 30 days C. 73 days Net sales on account during year P 500,000
B. 65 days D. 36 days Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Cash collection Accounts receivable, end of year 35,000
x
. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in Inventory, beginning of year 90,000
accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of Inventory, end of year 110,000
P4,000. What was the cash collected from customers? A. 3.3 C. 3.7
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000
Days inventory
Inventory turnover xv
. Selected information from the accounting records of Eternity Manufacturing Company follows:
xi
. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for Net sales P3,600,000
2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What Cost of goods sold 2,400,000
was the inventory turnover for 2007? Inventories at January 1 672,000
A. 6.4 C. 5.3 Inventories at December 31 576,000
B. 6.0 D. 5.0 What is the number of days’ sales in average inventories for the year?
A. 102.2 C. 87.6
xii
. Selected information from the accounting records of Petals Company is as follows: B. 94.9 D. 68.1
Net sales for 2007 P900,000
Cost of goods sold for 2007 600,000 Turnover ratios
Inventory at December 31, 2006 180,000 Asset turnover
Inventory at December 31, 2007 156,000 Asset
571
xvi
. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is
3.0. What is the ending total asset balance? xx
. The balance sheet and income statement data for Candle Factory indicate the following:
A. P2,000,000. C. P2,800,000. Bonds payable, 10% (issued 1998 due 2022) P1,000,000
B. P1,200,000. D. P1,600,000. Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
Solvency ratios Income before income tax for year 350,000
Debt ratio Income tax for year 80,000
xvii
. Jordan Manufacturing reports the following capital structure: Common dividends paid 50,000
Current liabilities P100,000 Preferred dividends paid 15,000
Long-term debt 400,000 Based on the data presented above, what is the number of times bond interest charges were
Deferred income taxes 10,000 earned (round to one decimal point)?
Preferred stock 80,000 A. 3.7 C. 4.5
Common stock 100,000 B. 4.4 D. 3.5
Premium on common stock 180,000
Retained earnings 170,000 xxi
. The following data were abstracted from the records of Johnson Corporation for the year:
What is the debt ratio? Sales P1,800,000
A. 0.48 C. 0.93 Bond interest expense 60,000
B. 0.49 D. 0.96 Income taxes 300,000
Net income 400,000
Times interest earned How many times was bond interest earned?
xviii
. House of Fashion Company had the following financial statistics for 2006: A. 7.67 C. 12.67
Long-term debt (average rate of interest is 8%) P400,000 B. 11.67 D. 13.67
Interest expense 35,000
Net income 48,000 Net income
Income tax 46,000 xxii
. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for
Operating income 107,000 the year was P20,000, and the company’s tax rate is 40%. The company’s net income is:
What is the times interest earned for 2006? A. P22,000 C. P54,000
A. 11.4 times C. 3.1 times B. P42,000 D. P66,000
B. 3.3 times D. 3.7 times
Profitability Ratios
xix
. Brava Company reported the following on its income statement: Return on Common Equity
Income before taxes P400,000 xxiii
. Selected information for Ivano Company as of December 31 is as follows:
Income tax expense 100,000 2006 2007
Net income P300,000 Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000
An analysis of the income statement revealed that interest expense was P100,000. Brava noncumulative
Company’s times interest earned (TIE) was Common stock 600,000 800,000
A. 5 times C. 3.5 times Retained earnings 150,000 370,000
B. 4 times D. 3 times Dividends paid on preferred stock for the year 20,000 20,000
572
Net income for the year 120,000 240,000 B. 8 to 1 D. 16 to 1

Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for
xxvii
2007 is . On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common
A. 17% C. 21% stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
B. 19% D. 23% outstanding.
Additional information:
Dividend yield Stockholders’ equity at 12/31/07 P4,500,000
xxiv
. The following information is available for Duncan Co.: Net income year ended 12/31/07 1,200,000
2006 Dividends on preferred stock year ended 12/31/07 300,000
Dividends per share of common stock P 1.40 Market price per share of common stock at 12/31/07 144
Market price per share of common stock 17.50 The price-earnings ratio on common stock at December 31, 2007, was
Which of the following statements is correct? A. 10 to 1 C. 14 to 1
A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market B. 12 to 1 D. 16 to 1
price of their stocks.
B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns Payout ratio
xxviii
on their investments. . Selected financial data of Alexander Corporation for the year ended December 31, 2007, is
C. The dividend yield is 12.5%, which is of interest to bondholders. presented below:
D. The dividend yield is 8.0 times the market price, which is important in solvency analysis. Operating income P900,000
Interest expense (100,000)
Market Test Ratios Income before income taxes 800,000
Market/Book value ratio Income tax (320,000)
Price per share Net income 480,000
xxv
. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book Preferred stock dividend (200,000)
value of equity of P3,000,000, and a market/book ratio of 3.5? Net income available to common stockholders Total Assets
A. P8.57 C. P85.70 P1,040,000
B. P30.00 D. P105.00
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
P/E ratio
xxvi
. Orchard Company’s capital stock at December 31 consisted of the following: . Answer: D
 Common stock, P2 par value; 100,000 shares authorized, issued, and Times interest earned: Earnings before interest ÷ Interest
outstanding. Income before tax (P48,000 + P46,000) P 94,000
 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares Add Interest expense 35,000
authorized, issued, and outstanding. Income before Interest expense P129,000
Orchard’s common stock, which is listed on a 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. TIE: P129,000 ÷ P35,000 3.7 times
The yearly preferred dividend was declared. No capital stock transactions occurred. What
was the price earnings ratio on Orchard’s common stock at December 31? . Answer: A
A. 6 to 1 C. 10 to 1 TIE: Income before interest expense ÷ Interest expense
573
Income before income tax P400,000 Market Value of Equity (P3M x 3.5) P10,500,000
Add back Interest expense 100,000 Market price per share: (P10.5M ÷ 100,000) P105
Income before interest expense P500,000
. Answer: B
TIE: P500,000 ÷ P100,000 5 times EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
. Answer: C
Interest Expense: P1M x 0.1 P100,000 . Answer: D
Income before interest expense: P350,000 + P100,000 P450,000 EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
Times interest earned: (P450,000 ÷ P100,000) 4.5 times P/E Ratio: 144 ÷ 9 16
. Answer: C . Answer: A
Net income P400,000 Payout Ratio: Common Dividends ÷ Income Available to Common
Add: Income taxes P300,000 P120,000 ÷ P280,000 = 42.9%
Interest 60,000 360,000
Income before interest P760,000 . Answer: B
Price-earnings ratio: Market price ÷ EPS
TIE: P760,000 ÷ P60,000 12.67 times EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
. Answer: B P/E Ratio: P60 ÷ P4 15.0X
Earnings before interest expense (P20,000 x 4.5) P90,000
Deduct interest expense 20,000 . Answer: C
Income before income tax P70,000 Payout Ratio: Dividends ÷ Income to Common
Deduct income tax (P70,000 x 0.4) 28,000 P40,000÷ P200,000 = 20.0%
Net income P42,000
. Answer: D
. Answer: D ROE: (8% x 1.25) 10.00%
Income to Common; (P240,000 – P20,000) P220,000 Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000 Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
Return on Common Equity: (P220 ÷ P960) 23 percent Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
. Answer: B . Answer: A
The dividend yield is 8 percent (P1.40 ÷ P17.50) 1 – (0.03 ÷ 0.05) = 40%
The dividend yield measures the return of investment in terms of dividends received. The
total expected returns consists of Dividend Yield and the Appreciation in market price and . Answer: B
dividend Degree of Financial Leverage: Operating Income ÷ Interest Expense
. Answer: D . Answer: A
574
Total stockholders’ equity P8,000,000 Net sales: (P950,000 x 5) P4,750,000

Deduct: Cost of goods sold (P1,150,000 x 4) 4,600,000
Liquidation value of Preferred Stock (50,000 s P110) P5,500,000 Gross margin P 150,000
Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000
Common Equity P2,200,000 . Answer: C
Dividend per share: 0.75 x P2.20 P1.65
Book Value per Share: P2.2M ÷ 400,000 shares P5.50 Market price: 10 x 2.20 22.00
Dividend yield: P1.65 ÷ P22.00 = 7.5%
. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares . Answer: D
P140,000 ÷ 10,000 shares = P14.00 EBIT 1,250,000
Less interest expense 250,000
. Answer: A Earnings before tax 1,000,000
The inventory amount can be calculated as follows: Less Income tax 40% 400,000
Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1 Net income 600,000
current ratio, the amount of working capital and current liabilities are both P1,120,000. Less Preferred dividends 200,000
Earnings to Common Stock 400,000
Inventory: Current liabilities x (Current ratio – Acid test ratio) Earnings per share 400,000/25,000 16.00
P1,120,000 x (2.0 – 1.25) P840,000 Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40
A detailed computation can be made as follows: Dividend yield 6.4 ÷ (16 x 5) 8.0%
Current assets: P1,120,000 x 2 P2,240,000
Liquid assets: P1,120,000 x 1.25 1,400,000 . Answer: B
Inventory P 840,000 280,000
Common stock dividends were P120,000. The payout ratio is:
. Answer: C A. 42.9 percent C. 25.0 percent
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers) B. 66.7 percent D. 71.4 percent
360,000/(15 – 10.5) = P80,000
P/E ratio & Payout ratio
. Answer: A Use the following information for question Nos. 33 and 34:
Inventory balance (P120,000 x (2.0 – 1.5) P 60,000 Terry Corporation had net income of P200,000 and paid dividends to common stockholders of
Cost of goods sold 60,000 x 8 P480,000 P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000
Sales (P480,000 ÷ 0.60) P800,000 shares. Terry Corporation’s common stock is selling for P60 per share in the local stock
exchange.
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000 xxix
. Terry Corporation’s price-earnings ratio is
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000 A. 3.8 times C. 18.8 times
B. 15 times D. 6 times
575
xxx
. Terry Corporation’s payout ratio for 2007 is Other Ratios
A. P4 per share C. 20.0 percent Book value per share
B. 12.5 percent D. 25.0 percent xxxiv
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following:
6% cumulative preferred stock, P100 par, liquidating value
DuPont Model was P110 per share; issued and outstanding 50,000 shares P5,000,000
Debt ratio Common stock, par, P5 per share; issued and
xxxi
. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and outstanding, 400,000 shares 2,000,000
asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total Retained earnings 1,000,000
debt ratio increase to achieve 20% ROE? Total P8,000,000
A. Total debt ratio must increase by .5 Dividends on preferred stock have been paid through 2006.
B. Total debt ratio must increase by 5 At December 31, 2007, M Corporation’s book value per share was
C. Total debt ratio must increase by 5% A. P5.50 C. P6.75
D. Total debt ratio must increase by 50% B. P6.25 D. P7.50
xxxii
. Assume you are given the following relationships for the Orange Company: xxxv
. The following data were gathered from the annual report of Desk Products.
Sales/total assets 1.5X Market price per share P30.00
Return on assets (ROA) 3% Number of common shares 10,000
Return on equity (ROE) 5% Preferred stock, 5% P100 par P10,000
The Orange Company’s debt ratio is Common equity B. should be smaller than return on sales
A. 40% C. 35% C. can be affected by the company’s choice of a depreciation method
B. 60% D. 65% D. should be larger than return on equity
Leverage Ratio Return on investments

Degree of financial leverage 72. Return on investment measures:
xxxiii
. A summarized income statement for Leveraged Inc. is presented below. A. return to all suppliers of funds C. return to all long-term suppliers of funds
Sales P1,000,000 B. return to all long-term creditors D. return to stockholders
Cost of Sales 600,000
Gross Profit P 400,000 Market test ratios
Operating Expenses 250,000 Price-earnings ratio
Operating Income P 150,000 56. The price/earnings ratio
Interest Expense 30,000 A. measures the past earning ability of the firm
Earnings Before Tax P 120,000 B. is a gauge of future earning power as seen by investors
Income Tax 40,000 C. relates price to dividends
Net Income P 80,000 D. relates
The degree of financial leverage is:
A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000 58. Which of the following ratios usually reflects investors opinions of the future prospects for the
B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000 firm?
576
D. a rise in total asset turnover 86. Companies A and B are in the same industry and have similar characteristics except that
Company A is more leveraged than Company B. Both companies have the same income
89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an before interest and taxes and the same total assets. Based on this information we could
average quick ratio, and a low inventory turnover. What might you assume about Tri-C? conclude that
A. Its cash balance is too low. C. Its current liabilities are too low. A. Company A has higher net income than Company B
B. Its cost of goods sold is too low. D. Its average inventory is too high. B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B.
Current ratio D. Company A has a lower debt ratio than company B
33. Which of the following would be most detrimental to a firm's current ratio if that ratio is
currently 2.0? Sensitivity Analysis
577
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should Short-term borrowing Increase Increase Decrease Decrease
A. improve its collection practices, thereby increasing cash and increasing its current and Collection of receivable No effect Increase No effect Decrease
quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current Profit margin
liabilities and increasing the current and quick ratios. 70. Which of the following would most likely cause a rise in net profit margin?
C. decrease current liabilities by utilizing more long-term debt, thereby increasing the A. increased sales C. decreased operating expenses
current and quick ratios. B. decreased preferred dividends D. increased cost of sales
D. increase inventory, thereby increasing current assets and the current and quick ratios.
Return on assets
43. Recently the M&M Company has been having problems. As a result, its financial situation has 67. Return on assets cannot fall under which of the following circumstances?
deteriorated. M&M approached the First National Bank for a badly needed loan, but the loan
A. B. C. D.
officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank
Net profit margin Decline Rise Rise Decline
would even consider granting the credit. Which of the following actions would do the most to
Total asset turnover Rise Decline Rise Decline
improve the ratio in the short run?
than those listed.
88. Which of the following actions will increase a firm's current ratio if it is now less than 1.0? A. A rise in preferred stock dividends.
A. Convert marketable securities to cash. B. A drop in sales with no change in interest expense.
B. Pay accounts payable with cash. C. An increase in interest rates.
C. Buy inventory with short term credit (i.e. accounts payable). D. An increase in bonds payable with no change in operating income.
D. Sell inventory at cost.
DuPont Analysis
Acid-test ratio 71. Which of the following could cause return on assets to decline when net profit margin is
38. If a company has an acid-test ratio of 1.2:1, what respective effects will the increasing?
A. sale of investments at year-end C. purchase of a new building at year-end
B. increased turnover of operating assets D. a stock split
have on the ratio?
578
Inventory 140,000
xxxvi
the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in xxxix
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
xl
xxxvii
B. can be stated as 100% increase D. can be stated as 200% increase xli
A. 1.80:1 C. 2.02:1
xxxviii
.The following financial data have been taken from the records of Ratio Company:
Bonds payable, due in 10 years 500,000 xlii
Notes payable, due in six months 250,000
xliii
What will happen to the ratios below if Ratio Company uses cash to pay 50 percent . Milward Corporation’s books disclosed the following information for the year ended December
of its accounts payable? 31, 2007:
A. B. C. D. Net credit sales P1,500,000
Current ratio Increase Decrease Increase Decrease Net cash sales 240,000
Acid-test ratio Increase Decrease Decrease Increase Accounts receivable at beginning of year 200,000
Accounts receivable at end of year 400,000
Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Milward’s accounts receivable turnover is
Company at the end of the current year: A. 3.75 times C. 5.00 times
Accounts payable P145,000 B. 4.35 times D. 5.80 times
579

xliv
. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the A. 5.6 C. 7.5
period of the receivables? . Based on the following data for the current year, what is the inventory turnover?
xlix

xlv
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000
Days inventory
Inventory turnover l
xlvi
A. 102.2 C. 87.6
xlvii
Petals’ inventory turnover for 2007 is li
A. 5.77 times C. 3.67 times 3.0. What is the ending total asset balance?
B. 3.85 times D. 3.57 times A. P2,000,000. C. P2,800,000.
B. P1,200,000. D. P1,600,000.
xlviii
Net Sales, 2007 P3,007,124 Solvency ratios
Net Sales, 2006 P 930,247 Debt ratio
Cost of Goods Sold, 2007 P2,000,326 lii
. Jordan Manufacturing reports the following capital structure:
Cost of Goods Sold, 2007 P1,000,120 Current liabilities P100,000
Inventory, beginning of 2007 P 341,169 Long-term debt 400,000
Inventory, end of 2007 P 376,526 Deferred income taxes 10,000
580

Common stock 100,000 B. 4.4 D. 3.5
Retained earnings 170,000 lvi
B. 0.49 D. 0.96 Income taxes 300,000
Net income 400,000
liii
Income tax 46,000 lvii
liv
Income before taxes P400,000 lviii
lv
Net income for the year 120,000 240,000
. The balance sheet and income statement data for Candle Factory indicate the following: Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for
Bonds payable, 10% (issued 1998 due 2022) P1,000,000 2007 is
Preferred 5% stock, P100 par (no change during year) 300,000 A. 17% C. 21%
Common stock, P50 par (no change during year) 2,000,000 B. 19% D. 23%
Income before income tax for year 350,000
Income tax for year 80,000 Dividend yield
Common dividends paid 50,000 lix
. The following information is available for Duncan Co.:
Preferred dividends paid 15,000 2006
Based on the data presented above, what is the number of times bond interest charges were Dividends per share of common stock P 1.40
earned (round to one decimal point)? Market price per share of common stock 17.50
581

on their investments. lxiii
. Selected financial data of Alexander Corporation for the year ended December 31, 2007, is
lx
value of equity of P3,000,000, and a market/book ratio of 3.5? Net income available to common stockholders Total Assets
A. P8.57 C. P85.70 P1,040,000
B. P30.00 D. P105.00
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
P/E ratio
lxi
B. 8 to 1 D. 16 to 1 Income before income tax P400,000
Add back Interest expense 100,000
lxii
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common Income before interest expense P500,000
stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
outstanding. TIE: P500,000 ÷ P100,000 5 times
Stockholders’ equity at 12/31/07 P4,500,000 . Answer: C
Net income year ended 12/31/07 1,200,000 Interest Expense: P1M x 0.1 P100,000
Dividends on preferred stock year ended 12/31/07 300,000 Income before interest expense: P350,000 + P100,000 P450,000
Market price per share of common stock at 12/31/07 144 Times interest earned: (P450,000 ÷ P100,000) 4.5 times
The price-earnings ratio on common stock at December 31, 2007, was
582
. Answer: C . Answer: A
Net income P400,000 Payout Ratio: Common Dividends ÷ Income Available to Common
Add: Income taxes P300,000 P120,000 ÷ P280,000 = 42.9%
Interest 60,000 360,000
Income before interest P760,000 . Answer: B B. should be smaller than return on sales
C. can be affected by the company’s choice of a depreciation method
TIE: P760,000 ÷ P60,000 12.67 times D. should be larger than return on equity
. Answer: B Return on investments

Earnings before interest expense (P20,000 x 4.5) P90,000 72. Return on investment measures:
Deduct interest expense 20,000 A. return to all suppliers of funds C. return to all long-term suppliers of funds
Income before income tax P70,000 B. return to all long-term creditors D. return to stockholders
Deduct income tax (P70,000 x 0.4) 28,000
Net income P42,000 Market test ratios
. Answer: D 56. The price/earnings ratio
Income to Common; (P240,000 – P20,000) P220,000 A. measures the past earning ability of the firm
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000 B. is a gauge of future earning power as seen by investors
Return on Common Equity: (P220 ÷ P960) 23 percent C. relates price to dividends
D. relates
. Answer: B
The dividend yield is 8 percent (P1.40 ÷ P17.50) 58. Which of the following ratios usually reflects investors opinions of the future prospects for the
The dividend yield measures the return of investment in terms of dividends received. The firm?
total expected returns consists of Dividend Yield and the Appreciation in market price and A. dividend yield C. book value per share
dividend B. price/earnings ratio D. earnings per share
. Answer: D Dividend yield

Market Value of Equity (P3M x 3.5) P10,500,000 57. Which of the following ratios represents dividends per common share in relation to market
Market price per share: (P10.5M ÷ 100,000) P105 price per common share?
A. dividend payout C. price/earnings
. Answer: B B. dividend yield D. book value per share
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1 Financial Statement Analysis
Accounts Receivable
. Answer: D 26. Which of the following reasons should not be considered in order to explain why the
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00 receivables appear to be abnormally high?
P/E Ratio: 144 ÷ 9 16 A. Sales volume decreases materially late in the year.
B. Receivables have collectibility problems and possibly some should have been written off.
583
A. Buy raw materials on credit Current ratio
B. Sell marketable securities at cost 40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
C. Pay off accounts payable with cash A. improve its collection practices, thereby increasing cash and increasing its current and
D. Pay off a portion of long-term debt with cash quick ratios.
Fixed asset turnover ratio liabilities and increasing the current and quick ratios.
68. Which of the following circumstances will cause sales to fixed assets to be abnormally high? C. decrease current liabilities by utilizing more long-term debt, thereby increasing the
A. A labor-intensive industry. current and quick ratios.
B. The use of units-of-production depreciation. D. increase inventory, thereby increasing current assets and the current and quick ratios.
C. A highly mechanized facility.
D. High direct labor costs from a new union contract. 43. Recently the M&M Company has been having problems. As a result, its financial situation has
Total asset turnover officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank
81. A firm with a total asset turnover lower than the industry standard and a current ratio which would even consider granting the credit. Which of the following actions would do the most to
meets industry standard might have excessive: improve the ratio in the short run?
584

than those listed.
DuPont Analysis
borrowing of cash by short-term debt and collection of accounts receivable A. sale of investments at year-end C. purchase of a new building at year-end
have on the ratio? B. increased turnover of operating assets D. a stock split
A. B. C. D.
80. A firm with a lower net profit margin can improve its return on total assets by
A. increasing its debt ratio C. increasing its total asset turnover
B. decreasing its fixed assets turnover D. decreasing its total asset turnover
Profit margin
70. Which of the following would most likely cause a rise in net profit margin? PROBLEMS:
A. increased sales C. decreased operating expenses Horizontal analysis
B. decreased preferred dividends D. increased cost of sales lxiv
the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in
Return on assets 2008. The respective net income reported by Kline Corporation for 2007 and 2008 are:
67. Return on assets cannot fall under which of the following circumstances? A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000
A. B. C. D. B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
Total asset turnover Rise Decline Rise Decline . Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in
lxv
585

B. can be stated as 100% increase D. can be stated as 200% increase lxix
A. 1.80:1 C. 2.02:1
lxvi
Bonds payable, due in 10 years 500,000 lxx
lxxi
Accrued liabilities 4,000 Days receivable
lxxii
Cash 80,000 . Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the
Income tax payable 10,000 beginning of the year and a balance of P410,000 at the end of the year. The net credit sales
Inventory 140,000 during the year amounted to P4,000,000. Using 360-day year, what is the average collection
Marketable securities 250,000 period of the receivables?
Notes payable, short-term 85,000 A. 30 days C. 73 days
Prepaid expenses 15,000 B. 65 days D. 36 days
lxvii
. The amount of working capital for the company is: Cash collection
lxxiii
A. P351,000 C. P211,000 . Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in
B. P361,000 D. P336,000 accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of
P4,000. What was the cash collected from customers?
lxviii
. The company’s current ratio as of the balance sheet date is: A. P31,000 C. P34,000
A. 2.67:1 C. 2.02:1 B. P35,000 D. P25,000
586
Days inventory
Inventory turnover lxxviii
lxxiv
A. 102.2 C. 87.6
lxxv
Petals’ inventory turnover for 2007 is lxxix
B. P1,200,000. D. P1,600,000.
lxxvi
Cost of Goods Sold, 2007 P2,000,326 lxxx
The merchandise inventory turnover for 2007 is: Preferred stock 80,000
A. 5.6 C. 7.5 Common stock 100,000
B. 15.6 D. 7.7 Premium on common stock 180,000
Retained earnings 170,000
lxxvii
. Based on the following data for the current year, what is the inventory turnover? What is the debt ratio?
Net sales on account during year P 500,000 A. 0.48 C. 0.93
Cost of merchandise sold during year 330,000 B. 0.49 D. 0.96
Accounts receivable, end of year 35,000 Times interest earned
Inventory, beginning of year 90,000 lxxxi
. House of Fashion Company had the following financial statistics for 2006:
Inventory, end of year 110,000 Long-term debt (average rate of interest is 8%) P400,000
A. 3.3 C. 3.7 Interest expense 35,000
B. 8.3 D. 3.0 Net income 48,000
Income tax 46,000
587
lxxxii
Income before taxes P400,000 lxxxvi
lxxxiii
Common dividends paid 50,000 lxxxvii
A. 3.7 C. 4.5 Which of the following statements is correct?
B. 4.4 D. 3.5 A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market
lxxxiv
. The following data were abstracted from the records of Johnson Corporation for the year: B. The dividend yield is 8.0%, which is of special interest to investors seeking current returns
Sales P1,800,000 on their investments.
Bond interest expense 60,000 C. The dividend yield is 12.5%, which is of interest to bondholders.
Income taxes 300,000 D. The dividend yield is 8.0 times the market price, which is important in solvency analysis.
Net income 400,000
How many times was bond interest earned? Market Test Ratios
A. 7.67 C. 12.67 Market/Book value ratio
B. 11.67 D. 13.67 Price per share
lxxxviii
.What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book
Net income value of equity of P3,000,000, and a market/book ratio of 3.5?
lxxxv
. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for A. P8.57 C. P85.70
588
B. P30.00 D. P105.00
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49
P/E ratio
lxxxix
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common
xc Income before interest expense P500,000
A. 10 to 1 C. 14 to 1 . Answer: C
B. 12 to 1 D. 16 to 1 Net income P400,000
Add: Income taxes P300,000
Payout ratio Interest 60,000 360,000
xci
. Selected financial data of Alexander Corporation for the year ended December 31, 2007, is Income before interest P760,000
presented below:
Operating income P900,000 TIE: P760,000 ÷ P60,000 12.67 times
Income before income taxes 800,000 . Answer: B
Income tax (320,000) Earnings before interest expense (P20,000 x 4.5) P90,000
Net income 480,000 Deduct interest expense 20,000
Preferred stock dividend (200,000) Income before income tax P70,000
Net income available to common stockholders Total Assets Deduct income tax (P70,000 x 0.4) 28,000
P1,040,000 Net income P42,000
589
. Answer: D
. Answer: D ROE: (8% x 1.25) 10.00%
Income to Common; (P240,000 – P20,000) P220,000 Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000 Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
Return on Common Equity: (P220 ÷ P960) 23 percent Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
The dividend yield is 8 percent (P1.40 ÷ P17.50) 1 – (0.03 ÷ 0.05) = 40%
total expected returns consists of Dividend Yield and the Appreciation in market price and . Answer: B
Market Value of Equity (P3M x 3.5) P10,500,000 Total stockholders’ equity P8,000,000
Market price per share: (P10.5M ÷ 100,000) P105 Deduct:
Liquidation value of Preferred Stock (50,000 s P110) P5,500,000
. Answer: B Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000
EPS: P50,000 ÷ 100,000 shares P0.50 Common Equity P2,200,000
P/E Ratio: P4.00 ÷ P0.50 8 to 1
Book Value per Share: P2.2M ÷ 400,000 shares P5.50
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00 . Answer: C
P/E Ratio: 144 ÷ 9 16 Book Value per Share: Common Equity ÷ Outstanding Shares
P140,000 ÷ 10,000 shares = P14.00
. Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common . Answer: A
P120,000 ÷ P280,000 = 42.9% The inventory amount can be calculated as follows:
Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1
. Answer: B current ratio, the amount of working capital and current liabilities are both P1,120,000.
EPS: Net income ÷ /Weighted-average common shares Inventory: Current liabilities x (Current ratio – Acid test ratio)
EPS: P200,000 ÷ 50,000 shares P4.00 P1,120,000 x (2.0 – 1.25) P840,000
P/E Ratio: P60 ÷ P4 15.0X
A detailed computation can be made as follows:
. Answer: C Current assets: P1,120,000 x 2 P2,240,000
Payout Ratio: Dividends ÷ Income to Common Liquid assets: P1,120,000 x 1.25 1,400,000
P40,000÷ P200,000 = 20.0% Inventory P 840,000
590
. Answer: C A. 42.9 percent C. 25.0 percent

Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers) B. 66.7 percent D. 71.4 percent
360,000/(15 – 10.5) = P80,000
P/E ratio & Payout ratio
. Answer: A Use the following information for question Nos. 33 and 34:
Inventory balance (P120,000 x (2.0 – 1.5) P 60,000 Terry Corporation had net income of P200,000 and paid dividends to common stockholders of
Cost of goods sold 60,000 x 8 P480,000 P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000
Sales (P480,000 ÷ 0.60) P800,000 shares. Terry Corporation’s common stock is selling for P60 per share in the local stock
exchange.
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000 xcii
Net sales: (P950,000 x 5) P4,750,000
Cost of goods sold (P1,150,000 x 4) 4,600,000 xciii
. Terry Corporation’s payout ratio for 2007 is
Gross margin P 150,000 A. P4 per share C. 20.0 percent
B. 12.5 percent D. 25.0 percent
. Answer: C
Dividend per share: 0.75 x P2.20 P1.65 DuPont Model
Market price: 10 x 2.20 22.00 Debt ratio
Dividend yield: P1.65 ÷ P22.00 = 7.5% xciv
. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and
asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total
. Answer: D debt ratio increase to achieve 20% ROE?
EBIT 1,250,000 A. Total debt ratio must increase by .5
Less interest expense 250,000 B. Total debt ratio must increase by 5
Earnings before tax 1,000,000 C. Total debt ratio must increase by 5%
Less Income tax 40% 400,000 D. Total debt ratio must increase by 50%
Net income 600,000
Less Preferred dividends 200,000 xcv
. Assume you are given the following relationships for the Orange Company:
Earnings to Common Stock 400,000 Sales/total assets 1.5X
Earnings per share 400,000/25,000 16.00 Return on assets (ROA) 3%
Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40 Return on equity (ROE) 5%
The Orange Company’s debt ratio is
Dividend yield 6.4 ÷ (16 x 5) 8.0% A. 40% C. 35%
B. 60% D. 65%
. Answer: B
280,000 Leverage Ratio
Common stock dividends were P120,000. The payout ratio is: Degree of financial leverage
591
xcvi
. A summarized income statement for Leveraged Inc. is presented below. A. return to all suppliers of funds C. return to all long-term suppliers of funds
Sales P1,000,000 B. return to all long-term creditors D. return to stockholders
Gross Profit P 400,000 Market test ratios
Operating Expenses 250,000 Price-earnings ratio
Operating Income P 150,000 56. The price/earnings ratio
Interest Expense 30,000 A. measures the past earning ability of the firm
Earnings Before Tax P 120,000 B. is a gauge of future earning power as seen by investors
Income Tax 40,000 C. relates price to dividends
Net Income P 80,000 D. relates
B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000 firm?
A. dividend yield C. book value per share
Other Ratios B. price/earnings ratio D. earnings per share
Book value per share
xcvii
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: Dividend yield
6% cumulative preferred stock, P100 par, liquidating value 57. Which of the following ratios represents dividends per common share in relation to market
was P110 per share; issued and outstanding 50,000 shares P5,000,000 price per common share?
Common stock, par, P5 per share; issued and A. dividend payout C. price/earnings
outstanding, 400,000 shares 2,000,000 B. dividend yield D. book value per share
Retained earnings 1,000,000
Total P8,000,000 Financial Statement Analysis
Dividends on preferred stock have been paid through 2006. Accounts Receivable
At December 31, 2007, M Corporation’s book value per share was 26. Which of the following reasons should not be considered in order to explain why the
A. P5.50 C. P6.75 receivables appear to be abnormally high?
B. P6.25 D. P7.50 A. Sales volume decreases materially late in the year.
xcviii
. The following data were gathered from the annual report of Desk Products. C. Material amount of receivables are on the installment basis.
Market price per share P30.00 D. Sales volume expanded materially late in the year.
Number of common shares 10,000
Preferred stock, 5% P100 par P10,000 31. An acceleration in the collection of receivables will tend to cause the accounts receivable
Common equity B. should be smaller than return on sales turnover to:
C. can be affected by the company’s choice of a depreciation method A. decrease C. either increase or decrease
D. should be larger than return on equity B. remain the same D. increase
Return on investments Inventories

72. Return on investment measures: 32. Which of the following would best indicate that the firm is carrying excess inventory?
592
A. Accounts receivable C. Debt A. Using some cash to pay off some current liabilities.
B. Fixed assets D. Inventory B. Collecting some of the current accounts receivable.
C. Paying off some long-term debt.
Profitability analysis D. Purchasing additional inventory on credit (accounts payable).
84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
P2,500,000. Which of the following best compares the profitability of Denver and Oakland? 87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before
A. Oakland Enterprises is 25% more profitable than Denver Dynamics. borrowing P60,000 from the bank with a 3-month note payable. What effect did the
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't borrowing transaction have on Tyner Company's current ratio?
be quantified. A. The ratio remained unchanged.
C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics. B. The change in the current ratio cannot be determined.
593

than those listed.
DuPont Analysis
A. B. C. D.
Profit margin
B. decreased preferred dividends D. increased cost of sales xcix
Total asset turnover Rise Decline Rise Decline .
c
Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in
2007. The increase in net income of P300,000:
Debt ratio A. can be stated as 0% C. cannot be stated as a percentage
83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor, B. can be stated as 100% increase D. can be stated as 200% increase
has long-term debt of P200,000. Which of the following statements best represents an
analysis of the long-term debt position of these two firms? Liquidity ratios
A. Jones obviously has too much debt when compared to its competitor. ci
B. Smith Company's times interest earned should be lower than Jones. Accounts receivable P200,000
C. Smith has five times better long-term borrowing ability than Jones. Accounts payable 80,000
D. Not enough information to determine if any of the answers are correct. Bonds payable, due in 10 years 500,000
Cash 100,000
594
cvi
cvii
Cash 80,000 . Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the
cii
. The amount of working capital for the company is: Cash collection
cviii
A. P351,000 C. P211,000 . Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in
ciii
A. 2.67:1 C. 2.02:1 B. P35,000 D. P25,000
B. 2.44:1 D. 1.95:1
Inventory turnover
cix
civ
. The company’s acid-test ratio as of the balance sheet date is: . During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for
A. 1.80:1 C. 2.02:1 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What
B. 2.40:1 D. 1.76:1 was the inventory turnover for 2007?
A. 6.4 C. 5.3
Activity ratios B. 6.0 D. 5.0
Receivables turnover cx
cv
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of . Selected information from the accounting records of Petals Company is as follows:
P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the Net sales for 2007 P900,000
595

Petals’ inventory turnover for 2007 is cxiv
B. P1,200,000. D. P1,600,000.
cxi
Cost of Goods Sold, 2007 P2,000,326 cxv
A. 5.6 C. 7.5 Common stock 100,000
cxii
Inventory, beginning of year 90,000 cxvi
B. 8.3 D. 3.0 Net income 48,000
Income tax 46,000
Days inventory Operating income 107,000
cxiii
. Selected information from the accounting records of Eternity Manufacturing Company follows: What is the times interest earned for 2006?
Net sales P3,600,000 A. 11.4 times C. 3.1 times
Cost of goods sold 2,400,000 B. 3.3 times D. 3.7 times
Inventories at January 1 672,000
Inventories at December 31 576,000 cxvii
. Brava Company reported the following on its income statement:
What is the number of days’ sales in average inventories for the year? Income before taxes P400,000
A. 102.2 C. 87.6 Income tax expense 100,000
B. 94.9 D. 68.1 Net income P300,000
An analysis of the income statement revealed that interest expense was P100,000. Brava
596
cxviii
Common dividends paid 50,000 cxxii
cxix
Net income 400,000
cxxiii
. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book
cxx
the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: B. P30.00 D. P105.00
A. P22,000 C. P54,000
B. P42,000 D. P66,000 P/E ratio
cxxiv
. Orchard Company’s capital stock at December 31 consisted of the following:
Profitability Ratios  Common stock, P2 par value; 100,000 shares authorized, issued, and
Return on Common Equity outstanding.
cxxi
. Selected information for Ivano Company as of December 31 is as follows:  10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares
2006 2007 authorized, issued, and outstanding.
Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per
noncumulative share on December 31. Orchard’s net income for the year ended December 31 was P50,000.
597
cxxv
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common Income before interest expense P500,000
A. 10 to 1 C. 14 to 1 . Answer: C
cxxvi
presented below:
P1,040,000 Net income P42,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49 . Answer: D

Income to Common; (P240,000 – P20,000) P220,000
. Answer: D Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000
Times interest earned: Earnings before interest ÷ Interest Return on Common Equity: (P220 ÷ P960) 23 percent
Income before tax (P48,000 + P46,000) P 94,000
Add Interest expense 35,000 . Answer: B
Income before Interest expense P129,000 The dividend yield is 8 percent (P1.40 ÷ P17.50)
TIE: P129,000 ÷ P35,000 3.7 times total expected returns consists of Dividend Yield and the Appreciation in market price and
598
Market Value of Equity (P3M x 3.5) P10,500,000 Total stockholders’ equity P8,000,000
Market price per share: (P10.5M ÷ 100,000) P105 Deduct:
. Answer: B Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000
EPS: P50,000 ÷ 100,000 shares P0.50 Common Equity P2,200,000
P/E Ratio: P4.00 ÷ P0.50 8 to 1
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00 . Answer: C
P140,000 ÷ 10,000 shares = P14.00
. Answer: A
EPS: P200,000 ÷ 50,000 shares P4.00 P1,120,000 x (2.0 – 1.25) P840,000
P40,000÷ P200,000 = 20.0% Inventory P 840,000
. Answer: D . Answer: C
ROE: (8% x 1.25) 10.00% Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers)
Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33% 360,000/(15 – 10.5) = P80,000
Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%
Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00% . Answer: A
Inventory balance (P120,000 x (2.0 – 1.5) P 60,000
. Answer: A Cost of goods sold 60,000 x 8 P480,000
1 – (0.03 ÷ 0.05) = 40% Sales (P480,000 ÷ 0.60) P800,000
599
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000 cxxvii

Net sales: (P950,000 x 5) P4,750,000
Cost of goods sold (P1,150,000 x 4) 4,600,000 cxxviii
Gross margin P 150,000 A. P4 per share C. 20.0 percent
. Answer: C
Dividend yield: P1.65 ÷ P22.00 = 7.5% cxxix
Net income 600,000
Less Preferred dividends 200,000 cxxx
B. 60% D. 65%
. Answer: B
A. 42.9 percent C. 25.0 percent cxxxi
. A summarized income statement for Leveraged Inc. is presented below.
B. 66.7 percent D. 71.4 percent Sales P1,000,000
P/E ratio & Payout ratio Gross Profit P 400,000
Use the following information for question Nos. 33 and 34: Operating Expenses 250,000
Terry Corporation had net income of P200,000 and paid dividends to common stockholders of Operating Income P 150,000
P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 Interest Expense 30,000
shares. Terry Corporation’s common stock is selling for P60 per share in the local stock Earnings Before Tax P 120,000
exchange. Income Tax 40,000
Net Income P 80,000
600

B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000 firm?
A. dividend yield C. book value per share
Other Ratios B. price/earnings ratio D. earnings per share
Book value per share
cxxxii
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: Dividend yield
6% cumulative preferred stock, P100 par, liquidating value 57. Which of the following ratios represents dividends per common share in relation to market
was P110 per share; issued and outstanding 50,000 shares P5,000,000 price per common share?
Common stock, par, P5 per share; issued and A. dividend payout C. price/earnings
outstanding, 400,000 shares 2,000,000 B. dividend yield D. book value per share
Retained earnings 1,000,000
Total P8,000,000 Financial Statement Analysis
Dividends on preferred stock have been paid through 2006. Accounts Receivable
At December 31, 2007, M Corporation’s book value per share was 26. Which of the following reasons should not be considered in order to explain why the
A. P5.50 C. P6.75 receivables appear to be abnormally high?
B. P6.25 D. P7.50 A. Sales volume decreases materially late in the year.
cxxxiii
. The following data were gathered from the annual report of Desk Products. C. Material amount of receivables are on the installment basis.
Market price per share P30.00 D. Sales volume expanded materially late in the year.
Preferred stock, 5% P100 par P10,000 31. An acceleration in the collection of receivables will tend to cause the accounts receivable
Common equity B. should be smaller than return on sales turnover to:
C. can be affected by the company’s choice of a depreciation method A. decrease C. either increase or decrease
D. should be larger than return on equity B. remain the same D. increase
Return on investments Inventories

72. Return on investment measures: 32. Which of the following would best indicate that the firm is carrying excess inventory?
A. return to all suppliers of funds C. return to all long-term suppliers of funds A. a decline in the current ratio
B. return to all long-term creditors D. return to stockholders B. stable current ratio with declining quick ratios
C. a decline in days' sales in inventory
Market test ratios D. a rise in total asset turnover
56. The price/earnings ratio 89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an
A. measures the past earning ability of the firm average quick ratio, and a low inventory turnover. What might you assume about Tri-C?
B. is a gauge of future earning power as seen by investors A. Its cash balance is too low. C. Its current liabilities are too low.
C. relates price to dividends B. Its cost of goods sold is too low. D. Its average inventory is too high.
D. relates
601

A. Accounts receivable C. Debt A. Using some cash to pay off some current liabilities.
B. Fixed assets D. Inventory B. Collecting some of the current accounts receivable.
C. Paying off some long-term debt.
Profitability analysis D. Purchasing additional inventory on credit (accounts payable).
84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
P2,500,000. Which of the following best compares the profitability of Denver and Oakland? 87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before
A. Oakland Enterprises is 25% more profitable than Denver Dynamics. borrowing P60,000 from the bank with a 3-month note payable. What effect did the
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't borrowing transaction have on Tyner Company's current ratio?
be quantified. A. The ratio remained unchanged.
C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics. B. The change in the current ratio cannot be determined.
D. Further information is needed for a reasonable comparison. C. The ratio decreased.
D. The ratio increased.
Debt ratio
86. Companies A and B are in the same industry and have similar characteristics except that 88. Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
Company A is more leveraged than Company B. Both companies have the same income A. Convert marketable securities to cash.
before interest and taxes and the same total assets. Based on this information we could B. Pay accounts payable with cash.
conclude that C. Buy inventory with short term credit (i.e. accounts payable).
A. Company A has higher net income than Company B D. Sell inventory at cost.
B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B. Acid-test ratio
602
A. B. C. D.
Profit margin
B. decreased preferred dividends D. increased cost of sales cxxxiv
Total asset turnover Rise Decline Rise Decline cxxxv
. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in
2007. The increase in net income of P300,000:
Debt ratio A. can be stated as 0% C. cannot be stated as a percentage
83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor, B. can be stated as 100% increase D. can be stated as 200% increase
has long-term debt of P200,000. Which of the following statements best represents an
analysis of the long-term debt position of these two firms? Liquidity ratios
A. Jones obviously has too much debt when compared to its competitor. cxxxvi
.The following financial data have been taken from the records of Ratio Company:
B. Smith Company's times interest earned should be lower than Jones. Accounts receivable P200,000
C. Smith has five times better long-term borrowing ability than Jones. Accounts payable 80,000
D. Not enough information to determine if any of the answers are correct. Bonds payable, due in 10 years 500,000
Cash 100,000
Times interest earned Interest payable, due in three months 25,000
85. Which of the following will not cause times interest earned to drop? Assume no other changes Inventory 440,000
than those listed. Land 800,000
A. A rise in preferred stock dividends. Notes payable, due in six months 250,000
B. A drop in sales with no change in interest expense. What will happen to the ratios below if Ratio Company uses cash to pay 50 percent
C. An increase in interest rates. of its accounts payable?
D. An increase in bonds payable with no change in operating income. A. B. C. D.
Current ratio Increase Decrease Increase Decrease
DuPont Analysis Acid-test ratio Increase Decrease Decrease Increase
71. Which of the following could cause return on assets to decline when net profit margin is
603
Cash 80,000 cxlii
. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the
cxxxvii
.The amount of working capital for the company is: Cash collection
A. P351,000 C. P211,000 cxliii
. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in
cxxxviii
A. 2.67:1 C. 2.02:1 B. P35,000 D. P25,000
B. 2.44:1 D. 1.95:1
Inventory turnover
cxxxix
. The company’s acid-test ratio as of the balance sheet date is: cxliv
. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for
A. 1.80:1 C. 2.02:1 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What
B. 2.40:1 D. 1.76:1 was the inventory turnover for 2007?
A. 6.4 C. 5.3
Activity ratios B. 6.0 D. 5.0
Receivables turnover
cxl
. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of cxlv
. Selected information from the accounting records of Petals Company is as follows:
P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the Net sales for 2007 P900,000
year were P600,000 and P700,000, respectively. The receivables turnover was Cost of goods sold for 2007 600,000
A. 7.7 times. C. 9.3 times. Inventory at December 31, 2006 180,000
B. 10.8 times. D. 10.0 times. Inventory at December 31, 2007 156,000
Petals’ inventory turnover for 2007 is
cxli
. Milward Corporation’s books disclosed the following information for the year ended December A. 5.77 times C. 3.67 times
31, 2007: B. 3.85 times D. 3.57 times
Net credit sales P1,500,000
Net cash sales 240,000 cxlvi
Accounts receivable at beginning of year 200,000 Net Sales, 2007 P3,007,124
Accounts receivable at end of year 400,000 Net Sales, 2006 P 930,247
604
Cost of Goods Sold, 2007 P2,000,326 cl

A. 5.6 C. 7.5 Common stock 100,000
cxlvii
Inventory, beginning of year 90,000 cli
B. 8.3 D. 3.0 Net income 48,000
Income tax 46,000
Days inventory Operating income 107,000
cxlviii
. Selected information from the accounting records of Eternity Manufacturing Company follows: What is the times interest earned for 2006?
Net sales P3,600,000 A. 11.4 times C. 3.1 times
Cost of goods sold 2,400,000 B. 3.3 times D. 3.7 times
Inventories at January 1 672,000
Inventories at December 31 576,000 clii
. Brava Company reported the following on its income statement:
What is the number of days’ sales in average inventories for the year? Income before taxes P400,000
A. 102.2 C. 87.6 Income tax expense 100,000
B. 94.9 D. 68.1 Net income P300,000
An analysis of the income statement revealed that interest expense was P100,000. Brava
Turnover ratios Company’s times interest earned (TIE) was
Asset turnover A. 5 times C. 3.5 times
Asset B. 4 times D. 3 times
cxlix
3.0. What is the ending total asset balance? cliii
. The balance sheet and income statement data for Candle Factory indicate the following:
A. P2,000,000. C. P2,800,000. Bonds payable, 10% (issued 1998 due 2022) P1,000,000
B. P1,200,000. D. P1,600,000. Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
Solvency ratios Income before income tax for year 350,000
Debt ratio Income tax for year 80,000
605
Common dividends paid 50,000 clvii

cliv
Net income 400,000
clviii
. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book
clv
the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: B. P30.00 D. P105.00
A. P22,000 C. P54,000
B. P42,000 D. P66,000 P/E ratio
clix
. Orchard Company’s capital stock at December 31 consisted of the following:
Profitability Ratios  Common stock, P2 par value; 100,000 shares authorized, issued, and
Return on Common Equity outstanding.
clvi
. Selected information for Ivano Company as of December 31 is as follows:  10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares
2006 2007 authorized, issued, and outstanding.
Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per
noncumulative share on December 31. Orchard’s net income for the year ended December 31 was P50,000.
Common stock 600,000 800,000 The yearly preferred dividend was declared. No capital stock transactions occurred. What
Retained earnings 150,000 370,000 was the price earnings ratio on Orchard’s common stock at December 31?
Dividends paid on preferred stock for the year 20,000 20,000 A. 6 to 1 C. 10 to 1
Net income for the year 120,000 240,000 B. 8 to 1 D. 16 to 1
Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for clx
2007 is . On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common
A. 17% C. 21% stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
B. 19% D. 23% outstanding.
Dividend yield Stockholders’ equity at 12/31/07 P4,500,000
606
A. 10 to 1 C. 14 to 1 . Answer: C
clxi
presented below:
P1,040,000 Net income P42,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49 . Answer: D

. Answer: D Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000
Times interest earned: Earnings before interest ÷ Interest Return on Common Equity: (P220 ÷ P960) 23 percent
Add Interest expense 35,000 . Answer: B
Income before Interest expense P129,000 The dividend yield is 8 percent (P1.40 ÷ P17.50)
TIE: P129,000 ÷ P35,000 3.7 times total expected returns consists of Dividend Yield and the Appreciation in market price and
dividend
. Answer: A
TIE: Income before interest expense ÷ Interest expense . Answer: D
Income before income tax P400,000 Market Value of Equity (P3M x 3.5) P10,500,000
Add back Interest expense 100,000 Market price per share: (P10.5M ÷ 100,000) P105
. Answer: B
TIE: P500,000 ÷ P100,000 5 times EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
. Answer: C
607
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00 . Answer: C
P140,000 ÷ 10,000 shares = P14.00
. Answer: A
EPS: P200,000 ÷ 50,000 shares P4.00 P1,120,000 x (2.0 – 1.25) P840,000
P40,000÷ P200,000 = 20.0% Inventory P 840,000
1 – (0.03 ÷ 0.05) = 40% Sales (P480,000 ÷ 0.60) P800,000
Degree of Financial Leverage: Operating Income ÷ Interest Expense Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000
. Answer: A
Common Equity P2,200,000 . Answer: C
Book Value per Share: P2.2M ÷ 400,000 shares P5.50 Market price: 10 x 2.20 22.00
608
Dividend yield: P1.65 ÷ P22.00 = 7.5% clxiv

Net income 600,000
Less Preferred dividends 200,000 clxv
B. 60% D. 65%
. Answer: B
A. 42.9 percent C. 25.0 percent clxvi
Net Income P 80,000
clxii
. Terry Corporation’s price-earnings ratio is The degree of financial leverage is:
A. 3.8 times C. 18.8 times A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000
B. 15 times D. 6 times B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000
clxiii
B. 12.5 percent D. 25.0 percent clxvii
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following:
DuPont Model was P110 per share; issued and outstanding 50,000 shares P5,000,000
Debt ratio Common stock, par, P5 per share; issued and
609
outstanding, 400,000 shares 2,000,000 Unpaid Preferred Dividends (P5M x 6%) 300,000 5,800,000
Retained earnings 1,000,000 Common Equity P2,200,000
Total P8,000,000
Dividends on preferred stock have been paid through 2006. Book Value per Share: P2.2M ÷ 400,000 shares P5.50
At December 31, 2007, M Corporation’s book value per share was
A. P5.50 C. P6.75 . Answer: C
B. P6.25 D. P7.50 Book Value per Share: Common Equity ÷ Outstanding Shares
P140,000 ÷ 10,000 shares = P14.00
clxviii
Market price per share P30.00 . Answer: A
Number of common shares 10,000 The inventory amount can be calculated as follows:
Preferred stock, 5% P100 par P10,000 Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1
Common equity current ratio, the amount of working capital and current liabilities are both P1,120,000.
EPS: P200,000 ÷ 50,000 shares P4.00 P1,120,000 x (2.0 – 1.25) P840,000
P40,000÷ P200,000 = 20.0% Inventory P 840,000
1 – (0.03 ÷ 0.05) = 40% Sales (P480,000 ÷ 0.60) P800,000
Degree of Financial Leverage: Operating Income ÷ Interest Expense Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
. Answer: A
610

. Answer: C
Dividend yield: P1.65 ÷ P22.00 = 7.5% clxxi
Net income 600,000
Less Preferred dividends 200,000 clxxii
B. 60% D. 65%
. Answer: B
A. 42.9 percent C. 25.0 percent clxxiii
Net Income P 80,000
clxix
. Terry Corporation’s price-earnings ratio is The degree of financial leverage is:
A. 3.8 times C. 18.8 times A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000
B. 15 times D. 6 times B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000
clxx
611
clxxiv
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: B. debt to total assets. D. times-interest earned ratio.
was P110 per share; issued and outstanding 50,000 shares P5,000,000 73. Interest expense creates magnification of earnings through financial leverage because:
Common stock, par, P5 per share; issued and A. while earnings available to pay interest rise, earnings to residual owners rise faster
outstanding, 400,000 shares 2,000,000 B. interest accompanies debt financing
Retained earnings 1,000,000 C. interest costs are cheaper than the required rate of return to equity owners
Total P8,000,000 S. the use of interest causes higher earnings
Dividends on preferred stock have been paid through 2006.
At December 31, 2007, M Corporation’s book value per share was Measures of solvency
A. P5.50 C. P6.75 34. The set of ratios that is most useful in evaluating solvency is
B. P6.25 D. P7.50 A. debt ratio, current ratio, and times interest earned
B. debt ratio, times interest earned, and return on assets
clxxv
. The following data were gathered from the annual report of Desk Products. C. debt ratio, times interest earned, and quick ratio
Market price per share P30.00 D. debt ratio, times interest earned, and cash flow to debt
Preferred stock, 5% P100 par P10,000 49. Which of the following ratios is most relevant to evaluating solvency?
Common equity A. profitability C. leverage A. Return on assets C. Days’ purchases in accounts payable
B. liquidity D. risk and return B. Debt ratio D. Dividend yield
69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return? Fixed assets to long-term liabilities
A. common stockholders C. preferred shareholders 44. Which of the following ratios provides a solvency measure that shows the margin of safety of
B. general creditors such as banks D. bondholders noteholders or bondholders and also gives an indication of the potential ability of the business
to borrow additional funds on a long-term basis?
Measures of Risk A. ratio of fixed assets to long-term liabilities
54. The following groups of ratios primarily measure risk: B. ratio of net sales to assets
A. liquidity, activity, and common equity C. liquidity, activity, and debt C. number of days' sales in receivables
B. liquidity, activity, and profitability D. activity, debt, and profitability D. rate earned on stockholders' equity
Financial ratios Debt ratio

7. Ratios are used as tools in financial analysis 59. The debt ratio indicates:
A. a comparison of liabilities with total assets
55. Using financial leverage is a good financial strategy from the viewpoint of stockholders of B. the ability of the firm to pay its current obligations
companies having: C. the efficiency of the use of total assets
A. a high debt ratio C. a steadily declining current ratio D. the magnification of earnings caused by leverage
B. steady or rising profits D. cyclical highs and lows
78. The debt to total assets ratio measures
46. The ratio that indicates a company’s degree of financial leverage is the A. the company’s profitability.
A. cash debt coverage ratio. C. free cash flow ratio. B. whether interest can be paid on debt in the current year.
612
C. the proportion of interest paid relative to dividends paid. D. asset turnover and profit margin ratios.
D. the percentage of the total assets provided by creditor.
52. Stockholders are most interested in evaluating
Debt-to-equity ratio A. liquidity. C. profitability.
60. Which of the following statements best compares long-term borrowing capacity ratios? B. solvency. D. marketability.
A. The debt/equity ratio is more conservative than the debt ratio.
B. The debt to tangible net worth ratio is more conservative than the debt/equity ratio. Performance measures
C. The debt/equity ratio is more conservative than the debt to tangible net worth ratio. 48. The set of ratios that are most useful in evaluating profitability is
D. The debt ratio is more conservative than the debt/equity ratio. A. ROA, ROE, and debt to equity ratio C. ROA, ROE, and acid-test ratio
B. ROA, ROE, and dividend yield D. ROA, ROE, and cash flow to debt
Times interest earned
74. A times interest earned ratio of 0.90 to 1 means that Earnings per share
A. the firm will default on its interest payment 82. Which of the following ratios appears most frequently in annual reports?
B. net income is less than the interest expense A. Earnings per Share C. Profit Margin
C. the cash flow is less than the net income B. Return on Equity D. Debt/Equity
D. the cash flow exceeds the net income
Return on assets
Fixed charge coverage 64. Return on assets
61. A fixed charge coverage: A. can be determined by looking at a balance sheet
A. is a balance sheet indication of debt carrying ability B. should be smaller than return on sales
B. is an income statement indication of debt carrying ability C. can be affected by the company’s choice of a depreciation method
C. frequently includes research and development D. should be larger than return on equity
D. computation is standard from firm to firm
Return on investments
Off-balance sheet liabilities 72. Return on investment measures:
62. If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in A. return to all suppliers of funds C. return to all long-term suppliers of funds
the financial statements, then the B. return to all long-term creditors D. return to stockholders
A. times interest earned ratio will be overstated, based upon the financial statements
B. debt ratio will be understated Market test ratios
C. working capital will be understated Price-earnings ratio
D. fixed charge ratio will be overstated, based upon the financial statements 56. The price/earnings ratio
A. measures the past earning ability of the firm
Profitability ratios B. is a gauge of future earning power as seen by investors
Interested parties C. relates price to dividends
39. The return on assets ratio is affected by the D. relates
A. asset turnover ratio.
B. debt to total assets ratio. 58. Which of the following ratios usually reflects investors opinions of the future prospects for the
C. profit margin ratio. firm?
613
614
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should Short-term borrowing Increase Increase Decrease Decrease
A. improve its collection practices, thereby increasing cash and increasing its current and Collection of receivable No effect Increase No effect Decrease
quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current Profit margin
liabilities and increasing the current and quick ratios. 70. Which of the following would most likely cause a rise in net profit margin?
C. decrease current liabilities by utilizing more long-term debt, thereby increasing the A. increased sales C. decreased operating expenses
current and quick ratios. B. decreased preferred dividends D. increased cost of sales
D. increase inventory, thereby increasing current assets and the current and quick ratios.
Return on assets
43. Recently the M&M Company has been having problems. As a result, its financial situation has 67. Return on assets cannot fall under which of the following circumstances?
A. B. C. D.
officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank
would even consider granting the credit. Which of the following actions would do the most to
Total asset turnover Rise Decline Rise Decline
improve the ratio in the short run?
than those listed.
DuPont Analysis
A. sale of investments at year-end C. purchase of a new building at year-end
B. increased turnover of operating assets D. a stock split
have on the ratio?
615
Inventory 140,000
clxxvi
the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in clxxix
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
clxxx
clxxvii
B. can be stated as 100% increase D. can be stated as 200% increase clxxxi
A. 1.80:1 C. 2.02:1
clxxviii
Bonds payable, due in 10 years 500,000 clxxxii
.Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of
clxxxiii
What will happen to the ratios below if Ratio Company uses cash to pay 50 percent .Milward Corporation’s books disclosed the following information for the year ended December
616

clxxxiv
.Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the A. 5.6 C. 7.5
period of the receivables? .Based on the following data for the current year, what is the inventory turnover?
clxxxix

clxxxv
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000
Days inventory
Inventory turnover cxc
clxxxvi
. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods Net sales P3,600,000
sold for 2007 was P900,000, and the ending inventory at December 31, 2007 was Cost of goods sold 2,400,000
P180,000. What was the inventory turnover for 2007? Inventories at January 1 672,000
A. 102.2 C. 87.6
clxxxvii
Petals’ inventory turnover for 2007 is cxci
B. P1,200,000. D. P1,600,000.
clxxxviii
Cost of Goods Sold, 2007 P2,000,326 cxcii
617

Common stock 100,000 B. 4.4 D. 3.5
Retained earnings 170,000 cxcvi
B. 0.49 D. 0.96 Income taxes 300,000
Net income 400,000
cxciii
Income tax 46,000 cxcvii
cxciv
Income before taxes P400,000 cxcviii
.Selected information for Ivano Company as of December 31 is as follows:
cxcv
Common dividends paid 50,000 cxcix
618

on their investments. cciii
. Selected financial data of Alexander Corporation for the year ended December 31, 2007, is
cc
value of equity of P3,000,000, and a market/book ratio of 3.5? Net income available to common stockholders 280,000
A. P8.57 C. P85.70 Common stock dividends were P120,000. The payout ratio is:
B. P30.00 D. P105.00 A. 42.9 percent C. 25.0 percent
P/E ratio
cci
. Orchard Company’s capital stock at December 31 consisted of the following: P/E ratio & Payout ratio
 Common stock, P2 par value; 100,000 shares authorized, issued, and Use the following information for question Nos. 33 and 34:
outstanding. Terry Corporation had net income of P200,000 and paid dividends to common stockholders of
 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000
authorized, issued, and outstanding. shares. Terry Corporation’s common stock is selling for P60 per share in the local stock
Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per exchange.
share on December 31. Orchard’s net income for the year ended December 31 was P50,000.
cciv
The yearly preferred dividend was declared. No capital stock transactions occurred. What . Terry Corporation’s price-earnings ratio is
was the price earnings ratio on Orchard’s common stock at December 31? A. 3.8 times C. 18.8 times
A. 6 to 1 C. 10 to 1 B. 15 times D. 6 times
B. 8 to 1 D. 16 to 1
ccv
ccii
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common A. P4 per share C. 20.0 percent
stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and B. 12.5 percent D. 25.0 percent
outstanding.
Additional information: DuPont Model
Stockholders’ equity at 12/31/07 P4,500,000 Debt ratio
ccvi
Net income year ended 12/31/07 1,200,000 . The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and
Dividends on preferred stock year ended 12/31/07 300,000 asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total
Market price per share of common stock at 12/31/07 144 debt ratio increase to achieve 20% ROE?
The price-earnings ratio on common stock at December 31, 2007, was A. Total debt ratio must increase by .5
619
B. Total debt ratio must increase by 5 At December 31, 2007, M Corporation’s book value per share was
C. Total debt ratio must increase by 5% A. P5.50 C. P6.75
D. Total debt ratio must increase by 50% B. P6.25 D. P7.50
ccvii
. Assume you are given the following relationships for the Orange Company: ccx
Sales/total assets 1.5X Market price per share P30.00
Return on assets (ROA) 3% Number of common shares 10,000
Return on equity (ROE) 5% Preferred stock, 5% P100 par P10,000
The Orange Company’s debt ratio is Common equity P140,000
A. 40% C. 35% The book value per share is:
B. 60% D. 65% A. P30.00 C. P14.00
B. P15.00 D. P13.75
Leverage Ratio
Degree of financial leverage Integrated ratios
ccviii
. A summarized income statement for Leveraged Inc. is presented below. Liquidity & activity ratios
Sales P1,000,000 Inventory
Cost of Sales 600,000 ccxi
. The current assets of Mayon Enterprise consists of cash, accounts receivable, and
Gross Profit P 400,000 inventory. The following information is available:
Operating Expenses 250,000 Credit sales 75% of total sales
Operating Income P 150,000 Inventory turnover 5 times
Interest Expense 30,000 Working capital P1,120,000
Earnings Before Tax P 120,000 Current ratio 2.00 to 1
Income Tax 40,000 Quick ratio 1.25 to 1
Net Income P 80,000 Average Collection period 42 days
The degree of financial leverage is: Working days 360
A. P 150,000 ÷ P 30,000 C. P1,000,000 ÷ P400,000 The estimated inventory amount is:
B. P 150,000 ÷ P120,000 D. P 150,000 ÷ P 80,000 A. 840,000 C. 720,000
B. 600,000 D. 550,000
Other Ratios
Book value per share ccxii
. The following data were obtained from the records of Salacot Company:
ccix
. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: Current ratio (at year end) 1.5 to 1
6% cumulative preferred stock, P100 par, liquidating value Inventory turnover based on sales and ending inventory 15 times
was P110 per share; issued and outstanding 50,000 shares P5,000,000 Inventory turnover based on cost of goods sold and ending inventory 10.5 times
Common stock, par, P5 per share; issued and Gross margin for 2007 P360,000
outstanding, 400,000 shares 2,000,000 What was Salacot Company’s December 31, 2007 balance in the Inventory account?
Retained earnings 1,000,000 A. P120,000 C. P 80,000
Total P8,000,000 B. P 54,000 D. P 95,000
Dividends on preferred stock have been paid through 2006.
620
Net sales Common 25,000

ccxiii
. Selected data from Mildred Company’s year-end financial statements are presented below. Income tax rate 40 percent
The difference between average and ending inventory is immaterial. Price earnings ratio 5 times
Current ratio 2.0 The dividend yield ratio is
Quick ratio 1.5 A. 0.50 C. 0.40
Current liabilities P120,000 B. 0.12 D. 0.08
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40% Comprehensive
Mildred’s net sales for the year were ccxvii
. The balance sheets of Magdangal Company at the end of each of the first two
A. P 800,000 C. P 480,000 years of operations indicate the following:
B. P 672,000 D. P1,200,000 2007 2006
Total current assets P600,000 P560,000
Gross margin Total investments 60,000 40,000
ccxiv
. Selected information from the accounting records of the Blackwood Co. is as follows: Total property, plant, and equipment 900,000 700,000
Net A/R at December 31, 2006 P 900,000 Total current liabilities 150,000 80,000
Net A/R at December 31, 2007 P1,000,000 Total long-term liabilities 350,000 250,000
Accounts receivable turnover 5 to 1 Preferred 9% stock, P100 par 100,000 100,000
Inventories at December 31, 2006 P1,100,000 Common stock, P10 par 600,000 600,000
Inventories at December 31, 2007 P1,200,000 Paid-in capital in excess of par-common stock 60,000 60,000
Inventory turnover 4 to 1 Retained earnings 300,000 210,000
What was the gross margin for 2007?
Net income is P115,000 and interest expense is P30,000 for 2007.
A. P150,000 C. P300,000
What is the rate earned on total assets for 2007 (round percent to one decimal point)?
B. P200,000 D. P400,000
A. 9.3 percent C. 8.9 percent
Market Test Ratio
Dividend yield ccxviii
ccxv . What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)?
. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio
A. 10.6 percent C. 12.4 percent
of 75%. The dividend yield is
A. 25.0% C. 7.5%
B. 22.0% D. 10.0% ccxix
. What is the earnings per share on common stock for 2007, (round to two decimal places)?
ccxvi A. P1.92 C. P1.77
. The following were reflected from the records of Salvacion Company:
B. P1.89 D. P1.42
Earnings before interest and taxes P1,250,000
Interest expense 250,000 ccxx
. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to
Preferred dividends 200,000
one decimal point)?
Payout ratio 40 percent
A. 17.0 C. 12.4
Shares outstanding throughout 2006
B. 12.1 D. 15.9
Preferred 20,000
621
i
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
Note: For 2007 & 2008, 2006 was used as a base year.
ii
. Answer: C
iii
. Answer: C
Current Assets:
Cash P100,000
Total liquid assets 300,000
Inventory 440,000
Total current assets P740,000
Current Liabilities:
Accounts payable P 80,000
Notes payable, due in 6 months 250,000
Interest payable 25,000
Total current liabilities P355,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
Before any payment, the current ratio is above 1:1 and acid test ratio is below 1:1. Therefore, the current ratio shall
rise but acid test ratio shall go down. If any of these two ratios is below 1:1, the equal change in current assets and
current liabilities brings direct effect on the ratio, that is, equal increase in current assets and current liabilities causes
the ratio to rise.
iv
. Answer: A
Working capital equals the difference between the total current assets and total current liabilities.
Current Assets:
Cash P 80,000
Inventory 140,000
Prepaid expense 15,000
Total Current Assets P595,000
Accounts payable P145,000
Income tax payable 10,000
Notes payable, short-term 85,000
Accrued liabilities 4,000 244,000
Working Capital P351,000

v
. Answer: B
Current Ratio: Current Assets ÷ Current Liabilities
(P595,000 ÷ P244,000) = 2.44:1.00
vi
. Answer: A
Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00
vii
. Answer: D
AR Turnover: Credit sales ÷ Average AR
6,500,000/650,000 = 10.0 times
viii
. Answer: C
Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
ix
. Answer: D
Average Daily Sales: Annual credit sales ÷ Days’ Year
P4 million ÷ 360 days = P11,111
Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales

[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
x
. Answer: A
Sales P30,000
Add decrease in Accounts Receivable 1,000
Cash collected from sales P31,000
xi
. Answer: B
Inventory Turnover: Cost of Goods Sold ÷ Average Inventory
Cost of goods sold P 900,000
Add Ending inventory 180,000
Total cost available for sales 1,080,000
Deduct cost of purchases 960,000
Beginning inventory P 120,000
Average Inventory: (P120,000 + P180,000) ÷ 2 P150,000
Inventory Turnover: (P900,000 ÷ P150,000) 6 times
An alternative computation of the inventory turnover is to use Net Sales instead of Cost of Goods Sold.
xii
. Answer: D
Average inventory: (P180,000 + P156,000) ÷ 2 P168,000
Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times
xiii
. Answer: A
Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50
Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times
xiv
. Answer: A
xv
. Answer: B
Average Inventory: (P672,000 + P576,000) ÷2 P624,000
Inventory Turnover: (P2,400,000 ÷ P624,000) 3.846 times
Inventory Turnover in Days: 365 days ÷ 3.846 94.9 days
Alternative Computation:
Average daily cost of goods sold: = (P2,400,000 ÷ 365) P6,575.34
Turnover in Days: P624,000 ÷ P6,575.34 94.9 days
xvi
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Net sales: (P950,000 x 5) P4,750,000

Cost of goods sold (P1,150,000 x 4) 4,600,000
Gross margin P 150,000
xvii
. Answer: B
Current liabilities P 100,000
Long-term debt 400,000
Deferred income tax 10,000
Total Liabilities 510,000
Stockholders’ Equity
Preferred stock P 80,000
Common stock 100,000
Retained earnings 170,000 530,000
Total Assets P1,040,000
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

xviii
. Answer: D
Times interest earned: Earnings before interest ÷ Interest
Add Interest expense 35,000
Income before Interest expense P129,000
TIE: P129,000 ÷ P35,000 3.7 times

xix
. Answer: A
TIE: Income before interest expense ÷ Interest expense
Income before income tax P400,000
TIE: P500,000 ÷ P100,000 5 times

xx
. Answer: C
Interest Expense: P1M x 0.1 P100,000
Income before interest expense: P350,000 + P100,000 P450,000
Times interest earned: (P450,000 ÷ P100,000) 4.5 times
xxi
. Answer: C
Net income P400,000
Interest 60,000 360,000
Income before interest P760,000
TIE: P760,000 ÷ P60,000 12.67 times

xxii
. Answer: B
Deduct interest expense 20,000
Net income P42,000
xxiii
. Answer: D
Average Common Equity: (P750,000 + P1,170,000) ÷ 2 P960,000
Return on Common Equity: (P220 ÷ P960) 23 percent
xxiv
. Answer: B
The dividend yield is 8 percent (P1.40 ÷ P17.50)
The dividend yield measures the return of investment in terms of dividends received. The total expected returns
consists of Dividend Yield and the Appreciation in market price and dividend
xxv
. Answer: D
Market Value of Equity (P3M x 3.5) P10,500,000
Market price per share: (P10.5M ÷ 100,000) P105
xxvi
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
xxvii
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
xxviii
. Answer: A
Payout Ratio: Common Dividends ÷ Income Available to Common
P120,000 ÷ P280,000 = 42.9%
xxix
. Answer: B
EPS: Net income ÷ /Weighted-average common shares
EPS: P200,000 ÷ 50,000 shares P4.00
xxx
. Answer: C
Payout Ratio: Dividends ÷ Income to Common
P40,000÷ P200,000 = 20.0%
xxxi
. Answer: D
ROE: (8% x 1.25) 10.00%
Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%
xxxii
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
xxxiii
. Answer: B
Degree of Financial Leverage: Operating Income ÷ Interest Expense
xxxiv
. Answer: A
Total stockholders’ equity P8,000,000
Deduct:
Common Equity P2,200,000

xxxv
. Answer: C
Book Value per Share: Common Equity ÷ Outstanding Shares
P140,000 ÷ 10,000 shares = P14.00
xxxvi
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
xxxvii
. Answer: C
xxxviii
. Answer: C
Current Assets:
Cash P100,000
Inventory 440,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
the ratio to rise.
xxxix
. Answer: A
Current Assets:
Cash P 80,000
Inventory 140,000

xl
. Answer: B
(P595,000 ÷ P244,000) = 2.44:1.00
xli
. Answer: A
(P440,000 ÷ P244,000) = 1.80:1.00
xlii
. Answer: D
6,500,000/650,000 = 10.0 times
xliii
. Answer: C
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
xliv
. Answer: D

[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
xlv
. Answer: A
Sales P30,000
xlvi
. Answer: B
xlvii
. Answer: D
xlviii
. Answer: A
xlix
. Answer: A
l
. Answer: B
li
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

lii
. Answer: B
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

liii
. Answer: D
TIE: P129,000 ÷ P35,000 3.7 times

liv
. Answer: A
TIE: P500,000 ÷ P100,000 5 times

lv
. Answer: C
lvi
. Answer: C
Net income P400,000
Interest 60,000 360,000
TIE: P760,000 ÷ P60,000 12.67 times

lvii
. Answer: B
Net income P42,000
lviii
. Answer: D
lix
. Answer: B
lx
. Answer: D
lxi
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
lxii
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
lxiii
. Answer: A
P120,000 ÷ P280,000 = 42.9%
lxiv
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
lxv
. Answer: C
lxvi
. Answer: C
Current Assets:
Cash P100,000
Inventory 440,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
the ratio to rise.
lxvii
. Answer: A
Current Assets:
Cash P 80,000
Inventory 140,000

lxviii
. Answer: B
(P595,000 ÷ P244,000) = 2.44:1.00
lxix
. Answer: A
(P440,000 ÷ P244,000) = 1.80:1.00
lxx
. Answer: D
6,500,000/650,000 = 10.0 times
lxxi
. Answer: C
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
lxxii
. Answer: D
[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
lxxiii
. Answer: A
Sales P30,000
lxxiv
. Answer: B
lxxv
. Answer: D
lxxvi
. Answer: A
lxxvii
. Answer: A
lxxviii
. Answer: B
lxxix
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

lxxx
. Answer: B
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

lxxxi
. Answer: D
TIE: P129,000 ÷ P35,000 3.7 times

lxxxii
. Answer: A
TIE: P500,000 ÷ P100,000 5 times

lxxxiii
. Answer: C
lxxxiv
. Answer: C
Net income P400,000
Interest 60,000 360,000
TIE: P760,000 ÷ P60,000 12.67 times

lxxxv
. Answer: B
Net income P42,000
lxxxvi
. Answer: D
lxxxvii
. Answer: B
lxxxviii
. Answer: D
lxxxix
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
xc
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
xci
. Answer: A
P120,000 ÷ P280,000 = 42.9%
xcii
. Answer: B
EPS: P200,000 ÷ 50,000 shares P4.00
xciii
. Answer: C
P40,000÷ P200,000 = 20.0%
xciv
. Answer: D
ROE: (8% x 1.25) 10.00%
xcv
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
xcvi
. Answer: B
xcvii
. Answer: A
Deduct:

xcviii
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
xcix
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
c
. Answer: C
ci
. Answer: C
Current Assets:
Cash P100,000
Inventory 440,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
the ratio to rise.
cii
. Answer: A
Current Assets:
Cash P 80,000
Inventory 140,000

ciii
. Answer: B
(P595,000 ÷ P244,000) = 2.44:1.00
civ
. Answer: A
(P440,000 ÷ P244,000) = 1.80:1.00
cv
. Answer: D
6,500,000/650,000 = 10.0 times
cvi
. Answer: C
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
cvii
. Answer: D

[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
cviii
. Answer: A
Sales P30,000
cix
. Answer: B
cx
. Answer: D
cxi
. Answer: A
cxii
. Answer: A
cxiii
. Answer: B
cxiv
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

cxv
. Answer: B
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

cxvi
. Answer: D
TIE: P129,000 ÷ P35,000 3.7 times

cxvii
. Answer: A
TIE: P500,000 ÷ P100,000 5 times

cxviii
. Answer: C
cxix
. Answer: C
Net income P400,000
Interest 60,000 360,000
TIE: P760,000 ÷ P60,000 12.67 times

cxx
. Answer: B
Net income P42,000
cxxi
. Answer: D
cxxii
. Answer: B
cxxiii
. Answer: D
cxxiv
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
cxxv
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
cxxvi
. Answer: A
P120,000 ÷ P280,000 = 42.9%
cxxvii
. Answer: B
EPS: P200,000 ÷ 50,000 shares P4.00
cxxviii
. Answer: C
P40,000÷ P200,000 = 20.0%
cxxix
. Answer: D
ROE: (8% x 1.25) 10.00%
cxxx
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
cxxxi
. Answer: B
cxxxii
. Answer: A
Deduct:

cxxxiii
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
cxxxiv
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
cxxxv
. Answer: C
cxxxvi
. Answer: C
Current Assets:
Cash P100,000
Inventory 440,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
the ratio to rise.
cxxxvii
. Answer: A
Current Assets:
Cash P 80,000
Inventory 140,000

cxxxviii
. Answer: B
(P595,000 ÷ P244,000) = 2.44:1.00
cxxxix
. Answer: A
(P440,000 ÷ P244,000) = 1.80:1.00
cxl
. Answer: D
6,500,000/650,000 = 10.0 times
cxli
. Answer: C
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
cxlii
. Answer: D

[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
cxliii
. Answer: A
Sales P30,000
cxliv
. Answer: B
cxlv
. Answer: D
cxlvi
. Answer: A
cxlvii
. Answer: A
cxlviii
. Answer: B
cxlix
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

cl
. Answer: B
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

cli
. Answer: D
TIE: P129,000 ÷ P35,000 3.7 times

clii
. Answer: A
TIE: P500,000 ÷ P100,000 5 times

cliii
. Answer: C
cliv
. Answer: C
Net income P400,000
Interest 60,000 360,000
TIE: P760,000 ÷ P60,000 12.67 times

clv
. Answer: B
Net income P42,000
clvi
. Answer: D
clvii
. Answer: B
clviii
. Answer: D
clix
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
clx
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
clxi
. Answer: A
P120,000 ÷ P280,000 = 42.9%
clxii
. Answer: B
EPS: P200,000 ÷ 50,000 shares P4.00
clxiii
. Answer: C
P40,000÷ P200,000 = 20.0%
clxiv
. Answer: D
ROE: (8% x 1.25) 10.00%
clxv
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
clxvi
. Answer: B
clxvii
. Answer: A
Deduct:

clxviii
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
clxix
. Answer: B
EPS: P200,000 ÷ 50,000 shares P4.00
clxx
. Answer: C
P40,000÷ P200,000 = 20.0%
clxxi
. Answer: D
ROE: (8% x 1.25) 10.00%
clxxii
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
clxxiii
. Answer: B
clxxiv
. Answer: A
Deduct:

clxxv
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
clxxvi
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
clxxvii
. Answer: C
clxxviii
. Answer: C
Current Assets:
Cash P100,000
Inventory 440,000
Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
the ratio to rise.
clxxix
. Answer: A
Current Assets:
Cash P 80,000
Inventory 140,000
clxxx
. Answer: B
(P595,000 ÷ P244,000) = 2.44:1.00
clxxxi
. Answer: A
(P440,000 ÷ P244,000) = 1.80:1.00
clxxxii
. Answer: D
6,500,000/650,000 = 10.0 times
clxxxiii
. Answer: C
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
clxxxiv
. Answer: D

[(P390,000 + P410,000) ÷ 2] ÷ P11,111 = 36 days
clxxxv
. Answer: A
Sales P30,000
clxxxvi
.
Answer: B
clxxxvii
. Answer: D
clxxxviii
. Answer: A
clxxxix
. Answer: A
cxc
. Answer: B
cxci
. Answer: A
Net sales: (P950,000 x 5) P4,750,000

cxcii
. Answer: B
Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

cxciii
. Answer: D
TIE: P129,000 ÷ P35,000 3.7 times

cxciv
. Answer: A
TIE: P500,000 ÷ P100,000 5 times

cxcv
. Answer: C
cxcvi
. Answer: C
Net income P400,000
Interest 60,000 360,000
TIE: P760,000 ÷ P60,000 12.67 times

cxcvii
. Answer: B
Net income P42,000
cxcviii
. Answer: D
cxcix
. Answer: B
cc
. Answer: D
cci
. Answer: B
EPS: P50,000 ÷ 100,000 shares P0.50
P/E Ratio: P4.00 ÷ P0.50 8 to 1
ccii
. Answer: D
EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00
P/E Ratio: 144 ÷ 9 16
cciii
. Answer: A
P120,000 ÷ P280,000 = 42.9%
cciv
. Answer: B
EPS: P200,000 ÷ 50,000 shares P4.00
ccv
. Answer: C
P40,000÷ P200,000 = 20.0%
ccvi
. Answer: D
ROE: (8% x 1.25) 10.00%
ccvii
. Answer: A
1 – (0.03 ÷ 0.05) = 40%
ccviii
. Answer: B
ccix
. Answer: A
Deduct:

ccx
. Answer: C
P140,000 ÷ 10,000 shares = P14.00
ccxi
. Answer: A
The inventory amount can be calculated as follows:
Current liabilities: Working Capital = current liabilities based on 2:1 current ratio. At 2:1 current ratio, the amount of
working capital and current liabilities are both P1,120,000.
Inventory: Current liabilities x (Current ratio – Acid test ratio)

P1,120,000 x (2.0 – 1.25) P840,000

Current assets: P1,120,000 x 2 P2,240,000
Liquid assets: P1,120,000 x 1.25 1,400,000
Inventory P 840,000
ccxii
. Answer: C
Inventory balance: Gross profit ÷ (Difference between 2 inventory turnovers)
360,000/(15 – 10.5) = P80,000
ccxiii
. Answer: A
Cost of goods sold 60,000 x 8 P480,000
Sales (P480,000 ÷ 0.60) P800,000
ccxiv
. Answer: A
Net sales: (P950,000 x 5) P4,750,000
ccxv
. Answer: C
Market price: 10 x 2.20 22.00
Dividend yield: P1.65 ÷ P22.00 = 7.5%
ccxvi
. Answer: D
EBIT 1,250,000
Less interest expense 250,000
Earnings before tax 1,000,000
Less Income tax 40% 400,000
Net income 600,000
Less Preferred dividends 200,000
Earnings to Common Stock 400,000
Earnings per share 400,000/25,000 16.00
Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40
Dividend yield 6.4 ÷ (16 x 5) 8.0%

ccxvii
. Answer: B
ROA: Operating income ÷ Average Total Assets
P145,000 ÷ P1,430,000 = 10.1%
ccxviii
. Answer: B
Return on stockholders’ equity: Net income ÷ Average stockholders’ equity
P115,000 ÷ P1,027,500 = 11.2%
ccxix
. Answer: C
Net income P115,000
Deduct Preferred Dividends 9,000
Income available to common shares P106,000
EPS: (P106,000 ÷ 60,000) P1.77

ccxx
. Answer: A
P/E Ratio: P30 ÷ 1.766 = 17.0 times

Financial Statement Analysis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Statement Analysis

Uploaded by

Copyright:

Available Formats

Financial Statement Analysis

ratios Horizontal analysis

Financial Leverage 11. Horizontal analysis is also known as

Market test ratios D. a rise in total asset turnover

Petals’ inventory turnover for 2007 is

Net income for the year 120,000 240,000 B. 8 to 1 D. 16 to 1

Total stockholders’ equity P8,000,000 Net sales: (P950,000 x 5) P4,750,000

Leverage Ratio Return on investments

Days receivable The merchandise inventory turnover for 2007 is:

A. 30 days C. 73 days Net sales on account during year P 500,000

Preferred stock 80,000 A. 3.7 C. 4.5

Which of the following statements is correct? A. 10 to 1 C. 14 to 1

. Answer: B Return on investments

. Answer: D Dividend yield

A. Using some cash to pay off some current liabilities.

2007. The increase in net income of P300,000: B. 2.44:1 D. 1.95:1

. Answer: C A. 42.9 percent C. 25.0 percent

Return on investments Inventories

C. The ratio decreased. Times interest earned

Cost of goods sold for 2007 600,000 Turnover ratios

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49 . Answer: D

dividend Degree of Financial Leverage: Operating Income ÷ Interest Expense

Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2 P 950,000 cxxvii

The degree of financial leverage is:

Return on investments Inventories

Current ratio D. Company A has a lower debt ratio than company B

Cost of Goods Sold, 2007 P2,000,326 cl

Common dividends paid 50,000 clvii

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49 . Answer: D

Dividend yield: P1.65 ÷ P22.00 = 7.5% clxiv

B. 12.5 percent D. 25.0 percent

Financial ratios Debt ratio

Days receivable The merchandise inventory turnover for 2007 is:

A. 30 days C. 73 days Net sales on account during year P 500,000

Preferred stock 80,000 A. 3.7 C. 4.5

Which of the following statements is correct? A. 10 to 1 C. 14 to 1

Net sales Common 25,000

Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Working Capital P351,000

Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales

Net sales: (P950,000 x 5) P4,750,000

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

TIE: P129,000 ÷ P35,000 3.7 times

TIE: P500,000 ÷ P100,000 5 times

TIE: P760,000 ÷ P60,000 12.67 times

Book Value per Share: P2.2M ÷ 400,000 shares P5.50

Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Working Capital P351,000

Average Collection Period: Average Accounts Receivable ÷ Average Daily Sales

Net sales: (P950,000 x 5) P4,750,000

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

TIE: P129,000 ÷ P35,000 3.7 times

TIE: P500,000 ÷ P100,000 5 times

TIE: P760,000 ÷ P60,000 12.67 times

Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Working Capital P351,000

Net sales: (P950,000 x 5) P4,750,000

Debt Ratio: P510,000 ÷ P1,040,000 = 0.49

TIE: P129,000 ÷ P35,000 3.7 times

TIE: P500,000 ÷ P100,000 5 times

TIE: P760,000 ÷ P60,000 12.67 times

Book Value per Share: P2.2M ÷ 400,000 shares P5.50

Current Ratio (740,000 ÷ 355,000) 2.08:1.00