Management Services by Luzviminda S.

Payongayong
Y2006 edition

MULTIPLE CHOICE PROBLEMS

1 D (P26,000 - P24,000) / P24,000 = 0.0833

2 D (P20,000 / 1.15%) = 17,391.30

3 A (P770 / 700) = 1.10

4 C (P750,000 - P600,000) / P600,000 = 0.25

5 D Average daily sales / 365 days

P5,840,000 / 365 days = P16,000
Average A/R / Average daily sales
P800,000 / P16,000 = 50 days

6 B A/R TO = Net credit sales/ average AR

P5,840,000 / [(P780,000 + P820,000) / 2 ] = 7.30 times

7 C PES = MV per share / EPS = P50 / 5 = 10.00 times

EPS = P250,000 / 50,000 shares = P5 per share

8 C POR = Dividend per share / EPS = (P60,000 / 50,000 sh) / P5 0.20

9 C Number of times interest earned = EBIT / Interest expense

(P420,000 + P80,000 ) / P80,000 = 6.25

10 B AR TO = Net sales / Average AR = 10 = ( NS / P400,000) = 4,000,000.00

11 A number of days = AAI / Average daily sales

29.2 dats = P60,000 / ADS
Ave. daily sales = P60,000 /29.2 days == P2,054.79 x 365 days = 749,998.35
or P750,000
12 B Asset TO = Net sales / Ave Total Assets
3 = P1,500,000 / Ave. total assets
Average Total assets = P1,500,000 / 3 = P500,000
Ending Total assets = (P500,000 x 2) - P700,000 = 300,000.00

13 A CAR = (P40,000 + P25,000 + P P20,000 ) / P60,000 = 1.42

14 C AR TO = Net Sales / Ave. AR = P85,000 / P25,000 = 3.40

15 B Inventory TO = Cost of Sales / Ave Inventory =

I TO = P45,000 / P20,000 = 2.25

16 A ROA = Net income / Ave. investments = P20,000 / P295,000 = 0.068

17 C Profit Ratio = Net income / Net sales = P20,000 / P85,000 = 0.235

18 A ROE = Net income / SE = P20,000 / P150,000 = 0.133

19 A P E R = Market value per share / EPS = P20 / (P20,000 / 6,000 sh)

= P20 / 3.33 = 6.0

20 A Cash provided by operations / Average Current liabilities

P30,000 / P60,000 = 0.50

21 D Debt / Equity ratio = Total Liabilities / Total SE

DER = (P1,000 + P2,000) / (P4,000 + P5,000) = 0.33

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22 B P1,475,000 AR TO = Net credit Sales / Ave. AR =

5 = NS / [(P250,000 + P300,000) / 2 ] =
Net sales = P275,000 x 5 = P1,375,000 + P100,000 1,475,000.00

23 D Inventory TO = P120,000 [(P25,000 + P35,000) / 2 ] = 4

Days in inventory = 360 days / 4 = 90

24 B Inventory TO = COS / AAI = P480,000 / P80,000 = 6

25 A EPS = NI / Shares outstanding = P10,000 / 2,000 shares 5.00

26 B EPS = P50,000 / 100,000 = 0.50

27 B NI + Expenses = Sales
ROE = NI / CSE = 12% = NI / P80,000 = P80,000 x 12% = 9,600.00
Net income, P9,6000 + Expenses, P43,000 = 52,600.00

28 C total assets = 80,000.00

stockholders equity = 60,000.00
total liabilities = 20,000.00
DER = P20,000 / P60,000 = 0.33

29 C ROA = NI before Interest , net of tax / ave. total assets

= P36,800 + [P4,000 x (1-.30)] / P400,000 =
= ( P36,800 + P2,8000 ) / P400,000 = 0.099

30 D ROE = (NI - Dividend to PS ) / Common Stockholders' equity

= [P36,8000 - (P100,000 x 8%) ] / (P60,000 + P150,000 + P30,000)
= P28,800 / P240,000 = 0.12

31 B EPS = P28,800 / ( P60,000 / P20 par) = P28,800 / 3,000 sh = 9.60

32 D For the write-off no change; for the recognition of bad debts, WC decrease by P30,000

33 A 5 = NS / [(P500,000 + P600,000 ) / 2] = P550,000

P550,000 x 5 = P2,750,000 + P200,000 = 2,950,000.00

34 C P2,200,000 / [(P400,000 + P 600,000 *) / 2 ] = 4.4 times

CGS 2,200,000.00
Ending inventory 400,000.00
total available for sale 2,600,000.00
purchases (2,000,000.00)
*beginning inventory 600,000.00

35 A Sales P4,000,000 x 162.5% = 6,500,000.00

Costs ( M , L & others) = P400,000 + P1,500,000 5,500,000.00
Net income 1,000,000.00
Income tax at 35% 350,000.00
Net income after tax 650,000.00

ROS = P650,000 / P6,500,000 = 0.10

36 C ROA = P650,000 / P2,600,000 = 0.25

37 C A T O = Net sales / Total assets = P6,500,000 / P2,600,000 2.50

38 B Total assets - Total liabilities = Stockholders' equity

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P2,600,000 - [(20% x P2,600,000)] = SE

P2,600,000 - P520,000 = P2,080,000
ROE = NI / SE = P 650,000 / P2,080,000 = 0.3125

39 C Sales = P120,000 / 10% = P1,200,000

AR balance = Sales / AR TO ; P1,200,000 / 8 = P150,000 150,000.00 #40
If AR is 60% of total current assets, TCA = P150,000 / .60 = P250,000
If cash is 8% of TCA, P250,000 x 8%, cash is P250,000 x 8% 20,000.00 #39
40 B

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Y2006 edition

CHAPTER 3 Financial Statement Analysis

PROBLEMS

3.1 a AR TO = P20,300 / [ (P7,500 + P6,800) / 2] =

P20,300 / P7,150 = 2.84 times

b Inventory TO = P10,300 / [(P12,200 + P 8,700) / 2 ] =

P10,300 / P10,450 = 0.99 times

3.2 a Current assets Ratio

Accounts Receivable 75,000.00
Cash 125,000.00
Inventory 90,000.00
Short term inventory 60,000.00
Total current assets a 350,000.00
Current liabilities
Accounts Payable 74,000.00
Short term Payable 40,000.00
b 114,000.00
Current assets Ratio (a / b) P350,000 / P114,000 = 3.07

b Quick asset ratio P260,000 / P 114,000 = 2.28

Accounts Receivable 75,000.00
Cash 125,000.00
Short term inventory 60,000.00
Total current assets 260,000.00

c Debt to total asset ratio = Total Debts / Total assets

= P185,000 / P469,000 = 0.394

d Profit margin ratio = Net income / Net sales

= P 31,500 / P 240,000 = 0.1313

3.3 Change Percentage

Increase Change
2018 2017 (decrease) Inc (dec)
a Accounts Receivable 175,000.00 140,000.00 35,000.00 25.00%
b Retained Earnings 30,000.00 (40,000.00) 70,000.00 none
c Sales 855,000.00 750,000.00 105,000.00 14.00%
d Operating Expenses 170,000.00 200,000.00 (30,000.00) -15.00%
e Income taxes payable 22,000.00 20,000.00 2,000.00 10.00%

3.4 2020 2019 2018

Net sales 226,000.00 212,000.00 200,000.00
113 106 100
Cost of Sales 150,000.00 140,000.00 136,000.00
110 103 100
Gross Profit 76,000.00 72,000.00 64,000.00
trends are all favorable - increasing 119 113 100

3.5 1 Inventory turnover =

COS / Ave Inventory = P600,000 [(P130,000 + P P150,000) / 2 ] =
P600,000 / P140,000 = 4.3 times

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Y2006 edition

2 Number of times interest earned ratio = EBIT / Interest expense

(P150,000 + P40,000 + P P60,000)] / P40,000
P250,000 / P40,000 = 6.25 times

3 Accounts Receivable Turnover = Net Sales / Ave. AR

P800,000 / [(P175,000 + P200,000 ) / 2 ] =
P800,000 / 187,500 = 4.3 times

4 Return on Assets ratio in 2008 = Net Income / Total assets =

P150,000 [(P1,100,000 + P 800,000) / 2 ] =
P150,000 / P950,000 = 15.79%

5 Current cash debt coverage ratio =

= Cash provided by operations / Average Current liabilities
P220,000 [(P140,000 + P110,000) / 2] = 1.76 times

3.6 a Current ratio = P270,000 / P170,000 = 1.588

b Current cash debt coverage ratio =

P120,000 / [(P170,000 + P155,000 ) /2 ] = 0.74 times

c Receivable turnover = Net Sales / Average AR

P475,000 [(P60,000 + P95,000 ) / 2 ] = P475,000 / P77,500 = 6.13 times

d Inventory Turnover = COS / Ave. inventory

P250,000 [(P110,000 + P 90,000 ) / 2] = P250,000 / P100,000 = 2.50 times

3.7 a Number of times bond interest earned =

= EBIT / Interest Expense = (P950,000 + P300,000) / (P5,000,000 x 6%)
1,250,000.0 / 30,000 4.17 times

b EPS of CS = Net income available to common stock / CS shares

= [P950,000 - P285,000 - (P1,000,000 x 6%)] / 200,000 shares
= (P665,000 - P60,000) / 200,000 shares = P 605,000 / 200,000 3.03 per share

c Price earnings ratio = Market value per share / EPS = P40 / P3.03 = 13.20

3.8 Y2014 = P 4,000,000

Y2015 = P4,000,000 x 60% = 2,400,000
Y2016 = ( P4,000,000 x 1.10%) + P4,000,000 = 8,400,000.00

3.9 Income Statement

Net sales 200,000.00
Cost of Sales 100,000.00
Gross Profit 100,000.00
Expenses:
Depreciation Expense 15,000.00 (5)
Interest Expense 5,000.00
Selling Expense 10,000.00
Administrative Expense 15,000.00
Total 45,000.00 (4)
Income before income tax 55,000.00 (2)
Tax expense 15,000.00 (3)

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Y2006 edition

Net income 40,000.00 (1)

Solutions:
1 Net income = Sales x Profit ratio = P200,000 x 20% = 40,000.00

Let X = income before taxes

X = 12
P5,000 interest expense

X = P5,000 x 12 = 60,000.00

Earnings before interest and taxes (EBIT) 60,000.00

Less, interest expense 5,000.00
Net income before taxes 55,000.00 (2)
Net income after taxes 40,000.00
Income taxes 15,000.00 (3)

4 Total Expenses = P100,000 - P55,000 = P45,000

5 Depreciation expense = Total Expenses less other expenses

= P45,000 - (P5,000 + P10,000 + P15,000) = 15,000.00

items for balance sheet:

6 AR TO = Net sales / Ave AR = P200,000 / AAR = 5 x
= Ave AR = P P200,000 / 5 = P40,000
AR, end = P40,000 x 2 = P80,000 - P50,000 = 30,000.00

7 Accounts Payable using acid test ratio:

Acid test ratio = 1.4
Total Current liabilities = (P25,000 + P15,000 + P P30,000) = 1.4
Current liabilities
AP = P70,000 / 1.4 = P50,000 - P35,000 = 35,000.00

8 Inventory using CAR CAR = 2.5 x

Total Current liabilities = P50,000
Total Current assets = P50,000 x 2.5 = 125,000.00
Less, quick assets 70,000.00
Inventory 55,000.00
9 Total Assets = TCA + PPE = P125,000 + P200,000 = 325,000.00
11 Total assets = P325,000, therefore, Total Liabilities and SE = P325,000
10 TLE = P325,000 - (P35,000 + P15,000 + P200,000 + P47,000) = 28,000.00

3.10 a AR TO = NS / Ave AR = P5,200,000 / P700,000 = 7.43

b Average collection period = 365 days / AR TO = 365 / 7.43 = 49 days

c Inventory turnover = COS / Ave Inventory

Cost of sales = P5,200,000 x 80% = P4,160,000
Average inventory:
Beg Inventory 482,000.00
Purchases 4,146,000.00
Available for sale 4,628,000.00
Cost of sales 4,160,000.00
Ending inventory 468,000.00
Average inventory = (P482,000 + P468,000) / 2 = P475,000

Inventory TO = P4,160,000 / P475,000 = 8.758

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d Average days in inventory = 365 days / 8.758 = 41.68 days

e ROE = NI / Ave. CSE = P420,000 / P3,500,000 = 12%

3.11
Total Current Current Effect on
Items Transactions assets Ratio Net Income
1 Issuance of additional common stock in cash increase + increase + none (ne)
2 Merchandise is sold for cash increase + increase + increase +
3 A fixed assets is sold less than its book value increase + increase + decrease -
4 Income tax due for the previous year is paid decrease - increase + none (ne)
5 A fixed assets is sold less than its book value increase + increase + decrease -
6 A fixed assets is sold more than its book value increase + increase + increase +
7 Merchandise is sold on credit increase + increase + increase +
8 Payment is made to trade accounts payable decrease - increase + none (ne)
9 A cash dividend is declared and paid decrease - decrease - none (ne)
10 Cash is obtained through short term loans increase + decrease - none (ne)
11 Short term notes receivable are sold at a discount decrease - decrease - decrease -
12 Marketable securities are sold below cost decrease - decrease - decrease -
13 Advances are made to employees none (ne) none (ne) none (ne)
14 Current operating expenses are paid decrease - decrease - decrease -
NOTES: In #2 and # 7 assumed regular sales were selling price is greater than its cost.

3.12
The company paid P2 in dividends and retained P2 per share. Since total retained earnings rose by P12 M,
there must be 6 million shares outstanding. With a book value of P40 per share, total common equity
must be P40 (6 million) = P240 million. Since the company has P120 million of debt, its debt ratio
must be 33.3 percent.
EPS = 4
Dividend per share = 2
Increase in Retained earnings 2 = P12,000,000

Debt/Assets = Debt / (debt + equity) = P120 M / (P120M + P240M) = 33.33%

3.13 SUPPORTING COMPUTATIONS TO THE BALANCE SHEET AND INCOME STATEMENT:

1 Net sales = Gross Profit / Gross profit ratio = P525,000 / 35% 1,500,000.00
2 Cost of sales = Net sales x cost of sates ratio P1,500,000 x 65% 975,000.00
3 Operating expenses = P1,500,000 x 15% 225,000.00
4 Operating income = P1,500,000-975,000-225000 300,000.00
5 Interest Expense = Operating income / times interest earned
P300,000 /6 times = 50,000.00

6 Bonds Payable = Interest expense / Interest Rate = 400,000.00

7 Receivable turnover = 360 days / age in receivables 360 days / 36 days 10 times
8 Average Receivable = Net credit sales / AR turnover P1,500,000 / 10 times 150,000.00
9 Ending Accounts Receivable = (Average AR x 2) - Beginning AR
(P150,000 x 2) - P160,000 140,000.00

10 Average inventory = Cost of goods sold / inventory turnover =

P975,000 / 4 times 243,750.00

11 Ending Inventory = (Average Inventory x 2) - Beginning inventory

(P243,750 x 2) - P250,000 237,500.00

12 Total debt = Ratio of total debt x stockholders' equity

.80 x P800,000 640,000.00

13 Current Liabilities = Total debt - Bonds payable = P640,000 -P400,000 240,000.00

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14 Quick assets = Acid - test ratio x Current liabilfities = 1.3 x P240,000 312,000.00
15 Cash = Quick assets - Marketable securities - Accounts Receivable
P312,000 - P50,000 - P140,000 122,000.00

Libby Company
Balance Sheet
As of December 31, 2018

ASSETS
Current Assets:
Cash 122,000.00
Marketable Securities 50,000.00
Accounts Receivable, net 140,000.00
Inventories 237,500.00 549,500.00
Plant Assets
Plant and Equipment, net 890,500.00
TOTAL ASSETS 1,440,000.00
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 240,000.00
Long Term Liabilities:
Bonds Payable, 12.5% 400,000.00
Total Liabilities 640,000.00
Stockholders' Equity:
Common Stock 500,000.00
Retained Earnings 300,000.00 800,000.00
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 1,440,000.00

Libby Company
Income Statement
As of December 31, 2018

Net sales 1,500,000.00

Cost of Goods Sold (975,000.00)
Gross Profit on sales 525,000.00
Operating Expenses (225,000.00)
Net operating income 300,000.00
Other Expenses:
Interest Expense (50,000.00)
Net income before taxers 250,000.00
Income taxes, 35% (87,500.00)
Net income 162,500.00

3.14
Ratios Formula Computations COMPUTA RATIO INDUSTRY
TIONS RESULTS AVE. STDS. COMMENTS

LIQUIDITY
CURRENT ASSET Current Assets / Current Liab. P700/P300 2.33 2.5 X slightly low
RATIO

ACID TEST RATIO (CA - Inventories) / Current Liab. P400 / P300 1.33 1X good

ASSET MGT RATIO

INVENTORY TO Cost of sales / Average Invty. P2544 /P257.5 9.88 9X good

DAYS SALES IN
INVENTORY 360 days / INV TO 360 d / 9.88 36.44 36 DAYS good

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ACCOUNTS Net sales / Average AR P3,000 /

RECEIVABLE TO P332.5 9.02 5X very good

DAYS SALES IN
ACCOUNTS REC.360 days / AR TO 360 / 9.02 39.91 36 DAYS good

FIXED ASSETS TO Net sales / net fixed assets P3T/P1.3T 2.31 3X low

TOTAL ASSETS TONet sales / Total assets P3T/P2T 1.50 1.8 X low

DEBTS MANAGEMENT
DET TO TOTAL
ASSETS Total Debt / Total assets P1.1T/P2T 0.55 0.40 high

TIMES INTEREST
IS EARNED EBIT / Interest charges P266/P66 4.03 6X low

FIXED CHARGE
COVERAGE EBIT + Lease Payments P294 3.13 5.5 X low
Interest Charges + Lease paymt P94
CASH FLOW
COVERAGE Cash inflows P394 2.79 3.2 X low
[Int. + Lease + (PS div/1-T) + P141
( Debt repaymt / 1-T)]

PROFITABILITY
PROFIT MARGIN Net income to CS / Sales P112/P3T 0.04 0.05 low
ON SALES

BASIC EARNING
POWER EBIT / Total assets P266/P2T 0.13 0.17 low

RETURN ON TOTAL
ASSETS (ROA) NI to CS / Total Assets P112/P2T 0.06 0.09 very low

RETURN ON COMMON
EQUITY (ROE) NI to CS / Common Equity P112/ P880 0.13 0.15 low
MARKET VALUE
PRICE/EARNINGS Price Per share/
RATIO Earnings per share P26.5/P2.24 11.83 12.5 X slightly low

MARKET BOOK Market price per share / P26.50

RATIO book value per share P17.60 1.51 1.8 X slightly low

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