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Chapter 2 Financial Statements Analysis Answer Key: True or False
Chapter 2 Financial Statements Analysis Answer Key: True or False
Answer Key
TRUE OR FALSE
1 TRUE 11 TRUE 21 TRUE 31 FALSE
2 FALSE 12 FALSE 22 TRUE 32 FALSE
3 TRUE 13 TRUE 23 TRUE 33 FALSE
4 TRUE 14 FALSE 24 FALSE 34 FALSE
5 TRUE 15 TRUE 25 TRUE 35 FALSE
6 TRUE 16 TRUE 26 TRUE 36 TRUE
7 FALSE 17 TRUE 27 FALSE 37 TRUE
8 FALSE 18 FALSE 28 FALSE 38 TRUE
9 TRUE 19 FALSE 29 TRUE 39 FALSE
10 FALSE 20 TRUE 30 FALSE 40 FALSE
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
32 D For the write-off no change; for the recognition of bad debts, WC decrease by P30,000
c Price earnings ratio = Market value per share / EPS = P40 / P3.03 = 13.20
Solutions:
1 Net income = Sales x Profit ratio = P200,000 x 20% = 40,000.00
X = P5,000 x 12 = 60,000.00
2.11
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.
2.12
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
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
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, 2003
2.14 MATCHING
P 1 price earnings ratio
P 2 return on assets ratio
L 3 receivables turnover ratio
P 4 earnings per share ratio
P 5 payout ratio
L 6 current cash debt coverage ratio
L 7 current ratio
S 8 debt to total assets ratio
S 9 free cash flow
L 10 inventory turnover ratio
2.15
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
DAYS SALES IN
INVENTORY 360 days / INV TO 360 d / 9.88 36.44 36 DAYS 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/EARNINGSPrice Per share/
RATIO Earnings per share P26.5/P2.24 11.83 12.5 X slightly low