Group 8:

Ansay, Allyson Charissa T.

Gabinete, Patrick Louis N.
Peji, Fery M.
Rosano, Diana Mae I.
Testing, Mark Daniel O.
Vidallon, Zymcel Ann D.

LESSON 2
FINCANCIAL MANAGEMENT

Activities/Assessments:
Exercise 2-1: LIQUIDITY ANALYSIS:
Indicate the effect of each of the following transactions on the company’s (A)
current ratio and (B) acid-test ratio. There are three possible effects: (+)
increase; (-) decrease; and (0) no effect. Before each transaction takes place, both
ratios are greater than 1:1.

Effects on
Transactions: (A) Current Ratio (B) Acid-Test Ratio
Example: Sell inventory for cash + +
1. Purchase inventory for cash 0 -
2. Pay trade payable + -
3. Sell old machinery for long-term notes at a 0 -
loss
4. Issue long-term debt securities + +
5. Collection of trade receivables 0 0
6. Record accrued salaries - 0
7. Purchase plant assets in cash basis - -
8. Sell land for cash at a profit + +
9. Sell used equipment for cash at a loss + +
10. Issuance of ordinary shares for cash + +
11. Proceeds from short-term loan + -
12. Buy marketable securities for cash 0 0
13. Issued ordinary shares in exchange for + +
plant assets
14. Issued ordinary shares in exchange for + +
inventories
15. Accounts receivable written-off 0 +

Exercise 2-2: FINANCIAL RATIOS:

ABC has 1, 000, 000 ordinary shares outstanding. The price of the stock is P8.
ABC declared dividends per share of P0.10. The balance sheet at the end of 2020
showed approximately the same amounts as that at the end of 2021. The financial
statements for ABC Merchandising are as follows:

ABC Company, Income Statement for 2021

Sales P 4,700, 000
Cost of goods sold 2, 300, 000
Gross Profit P2, 400, 000
Operating Expenses:
Depreciation P 320, 000
Other 1, 230, 000 1, 550, 000
Income before interest and taxes P 850, 000
Interest Expense 150, 000
Income before taxes P 700, 000
Income Taxes 280, 000
Net Income P 420, 000

ABC Company, Balance Sheet on December 31, 2021

Assets Liabilities & Equity

Cash P 220, 000 Accounts Payable P 190, 000

Accounts Receivable 440, 000 Accrued Expenses 180, 000

Inventory 410, 000 Total Current Liabilities P 370, 000

Total Current Assets P1, 070, 000 Long-term debt 1,960, 000

Plant & Equipment 5, 600, 000 Ordinary Shares 1, 810, 000

Accumulated Depreciation (2, 100, 000) Retained Earnings 430, 000

Total Assets P4, 570, 000 Total Liabilities & Equity P4, 570, 000

Required: (Round-off answers to two decimal places)

1. Current ratio:
Current ratio = current assets / current liabilities
= 1,070,000/ 370,000 = 2.89

2. Acid-test ratio:
Acid-test ratio = Quick assets / current liabilities / current liabilities
= (220,000 + 440,000) / (1,070,000 – 410,000) / 370,000 = 2.70

3. AR turnover:
AR turnover = net credit sales / average account receivable
=4,700,000 / 440,000 = 10.68

4. Inventory turnover:
Inventory turnover = COGS / average inventories
= 2,300,000 / 410,000 = 5.61

5. Gross Profit margin:

Gross profit margin = gross profit / net sales
= 2,400,000 / 4,700,00 = 0.51
6. Operating profit margin:
Operating profit margin = EBIT / net sales
= 850,000 / 4,700,000 = 0.18

7. Net profit margin or RoS:

Net profit margin = net income / net sales
= 420,000 / 4,700,000 = 0.09

8. Return on Assets:
Return on Asset= Net Income/ Total Assets
= 420,000/4,570,000 = 0.09 or 9 %

9. Days of Receivables:
Days of Receivables = (Average Nete Receivable/ Net Sales) x 360
 = 440,000/4,700,000

= 0.09 x 350 = 32 days

10. Days of inventories:

Days of Inventories = (Inventory/Cost of Goods Sold) x 360
= 410,000/2,300,000
= 0.18 x 360 = 65 days

11. EPS:
EPS = Net Income/ Average Ordinary shares outstanding
= 420,000/1,000 = 420

12. P/E ratio:

Price/Earning Ratio = Market Value per share/ Earnings per share
= 8/420 = 0.02 or 2%

13. Dividend Yield:

Dividend yield = Annual dividend per share/ market value per share
= 0.10/8 = 0.01

14. Payout ratio:

Payout Ratio = Dividend per share/ Net income
= 0.10/420,000 = 0.0000002381 or .000024%
15. Debt ratio:
Debt Ratio = Total Liabilities/Total Assets
= 2,330,000/ 4,570,000 = 0.51

16. Debt-Equity ratio:

Debt-Equity Ratio = Total Liabilities/Owner’s Equity
= 2,330,000/2,240,000 = 1.04

17. Times-interest earned:

Times-Interest Earned = Earnings before interest and taxes/
Interest Expense
= 850,000/150,000 = 5.67

18. Book value per share:

 Book Value per Share = Shareholder’s Equity/Ordinary Shares
Outstanding
= 2,240,000/1,000,000 = 2.24

19. Market/Book Ratio:

Market/Book Ratio = Market Capitalization/ Total Book Value
= 8,000,000/2,240,000 = 3.57

20. Retention ratio:

Retention Ratio = Retained Earnings/ Net Income x 100%
= 430,000/420,000 x 100% = 1.02%