Financial Statement Analysis

Suggested Answers and Solutions

FINANCIAL STATEMENT ANALYSIS

THEORIES:

1. C 21. D 41. B 61. B 81. B

2. D 22. B 42. D 62. B 82. A
3. D 23. B 43. D 63. B 83. D
4. D 24. B 44. A 64. C 84. D
5. B 25. D 45. C 65. D 85. A
6. A 26. A 46. B 66. B 86. C
7. B 27. D 47. D 67. C 87. C
8. D 28. D 48. B 68. A 88. C
9. B 29. D 49. B 69. A 89. D
10. A 30. B 50. D 70. C 90. A
11. C 31. D 51. C 71. C
12. D 32. B 52. C 72. C
13. A 33. D 53. D 73. A
14. D 34. D 54. C 74. B
15. C 35. B 55. B 75. B
16. B 36. D 56. B 76. A
17. B 37. A 57. B 77. B
18. A 38. C 58. B 78. D
19. A 39. D 59. A 79. B
20. C 40. C 60. B 80. C

PROBLEMS:

1. A 11. B 21. D 31. C 41. B

2. C 12. D 22. D 32. B 42. B
3. C 13. A 23. A 33. C 43. C
4. A 14. B 24. C 34. A 44. A
5. B 15. A 25. B 35. C 45. B
6. A 16. A 26. D 36. C
7. D 17. A 27. A 37. D
8. C 18. C 28. D 38. B
9. A 19. A 29. B 39. A
10. D 20. B 30. B 40. D

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SOLUTIONS:

1. Answer: A

2007: X ÷ P2,000,000 = 0.70

X = P2,000,000 x 0.70
X = P1,400,000

Net income: P2,000,000 – P1,400,000 P600,000

2008: X ÷ P2,000,000 = 1.75

X = P2,000,000 x 1.75
X = P3,500,000

Net income: P2,000,000 + P3,500,000 P5,500,000

2. Answer: C

3. Answer: C

Current Assets:

Cash P100,000
Accounts receivable 200,000
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

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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.

4. Answer: A

Working capital equals the difference between the total current

assets and total current liabilities.

Current Assets:
Cash P 80,000
Marketable securities 250,000
Accounts receivable 110,000
Total liquid assets 440,000
Inventory 140,000
Prepaid expense 15,000
Total Current Assets P595,000

Current Liabilities:
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

5. Answer: B

Current Ratio: Current Assets ÷ Current Liabilities

(P595,000 ÷ P244,000) 2.44:1.00

6. Answer: A

Acid-Test Ratio: Liquid Assets ÷ Current Liabilities

(P440,000 ÷ P244,000) 1.80:1.00

7. Answer: D

AR Turnover: Credit sales ÷ Average AR

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6,500,000/650,000 10.0 times

8. Answer: C

Accounts Receivable Turnover: Net Credit Sales ÷ Average

Accounts Receivable

P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] 5.0 times

9. Answer: A

Sales P30,000
Add decrease in Accounts Receivable 1,000

Cash collected from sales P31,000

10. 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

11. 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

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An alternative computation of the inventory turnover is to use Net

Sales instead of Cost of Goods Sold.

12. Answer: D

Average inventory: (P180,000 + P156,000) ÷ 2 P168,000

Inventory Turnover: (P600,000 ÷ P168,000) 3.57 times

13. Answer: A

Average Inventory: (P341,169 + P376,526) ÷ 2 P358,847.50

Inventory Turnover: (P2,000,326 ÷ P358,847.50) 5.6 times

14. 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

15. Answer: A

Average Inventory: (P90,000 + P110,000) ÷ 2 P100,000

Inventory Turnover: (P330,000 ÷ P100,000) 3.3 times

16. Answer: A

The inventory amount can be calculated as follows:

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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

A detailed computation can be made as follows:

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

17. Answer: A

Inventory balance (P120,000 x (2.0 – 1.5) P 60,000

Cost of goods sold 60,000 x 8 P480,000

Sales (P480,000 ÷ 0.60) P800,000

18. Answer: C

Inventory balance: Gross profit ÷ (Difference between 2

inventory turnovers)
360,000/(15 – 10.5) P80,000

19. Answer: A

Average Accounts Receivable:

(P900,000 ÷ P1,000,000) ÷ 2 P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000

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

20. Answer: B

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Average Total Assets (P6M ÷ 3.0) P2,000,000

Ending Total Assets: (2 x P2M) – P2.8M P1,200,000

21. Answer: D

Market Value of Equity (P3M x 3.5) P10,500,000

Market price per share: (P10.5M ÷ 100,000) P105

22. Answer: D

ROE: (8% x 1.25) 10.00%

Last year’s Debt Ratio 1 – (10% ÷ 15%) 33.33%
Proposed Debt Ratio 1 – (10% ÷ 20%) 50.00%

Increase in debt ratio: (50.00% - 33.33%) ÷ 33.33% 50.00%

23. Answer: A

1 – (0.03 ÷ 0.05) = 40%

24. Answer: C

Dividend per share: 0.75 x P2.20 P1.65

Market price: 10 x 2.20 22.00

Dividend yield: P1.65 ÷ P22.00 7.5%

25. Answer: B

Earnings before interest expense (P20,000 x 4.5) P90,000

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Deduct interest expense 20,000

Income before income tax P70,000
Deduct income tax (P70,000 x 0.4) 28,000

Net income P42,000

26. 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%

27. Answer: A

Total stockholders’ equity P8,000,000

Deduct:
Liquidation value of Preferred Stock
(50,000 s P110) P5,500,000
Unpaid Preferred Dividends
(P5M x 6%) 300,000 5,800,000
Common Equity
P2,200,000

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

28. Answer: D

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Times interest earned: Earnings before interest ÷ Interest

Income before tax (P48,000 + P46,000) P 94,000

Add Interest expense 35,000
Income before Interest expense P129,000

TIE: P129,000 ÷ P35,000 3.7 times

29. 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
Premium on common stock 180,000
Retained earnings 170,000 530,000
Total Assets P1,040,000

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

30. Answer: B

Degree of Financial Leverage: Operating Income ÷ Interest

Expense

31. Answer: C

Book Value per Share: Common Equity ÷ Outstanding Shares

P140,000 ÷ 10,000 shares P14.00

Use the following information for question Nos. 33 and 34:

Terry Corporation had net income of P200,000 and paid

dividends to common stockholders of P40,000 in 2007. The

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weighted-average number of shares outstanding in 2007 was

50,000 shares. Terry Corporation’s common stock is selling for
P60 per share in the local stock exchange.

32. Answer: B

Price-earnings ratio: Market price ÷ EPS

EPS: Net income ÷ /Weighted-average common shares

EPS: P200,000 ÷ 50,000 shares P4.00

P/E Ratio: P60 ÷ P4 15.0X

33. Answer: C

Payout Ratio: Dividends ÷ Income to Common

P40,000÷ P200,000 20.0%

34. Answer: A

TIE: Income before interest expense ÷ Interest expense

Income before income tax P400,000
Add back Interest expense 100,000
Income before interest expense
P500,000

TIE: P500,000 ÷ P100,000 5 times

35. 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

36. Answer: C

Net income P400,000

Add: Income taxes P300,000

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Interest 60,000 360,000

Income before interest P760,000

TIE: P760,000 ÷ P60,000 12.67 times

37. Answer: D

Income to Common; (P240,000 – P20,000) P220,000

Average Common Equity:
(P750,000 + P1,170,000) ÷ 2 P960,000

Return on Common Equity: (P220 ÷ P960) 23 percent

38. Answer: B

EPS: P50,000 ÷ 100,000 shares P0.50

P/E Ratio: P4.00 ÷ P0.50 8 to 1

39. Answer: A

Payout Ratio: Common Dividends ÷ Income Available to

Common

P120,000 ÷ P280,000 42.9%

40. Answer: D

EPS: (P1,200,000 – P300,000) ÷ 100,000 P9.00

P/E Ratio: 144 ÷ 9 16

41. Answer: B

ROA: Operating income ÷ Average Total Assets

P145,000 ÷ P1,430,000 10.1%

42. Answer: B

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Return on stockholders’ equity: Net income ÷ Average

stockholders’ equity

P115,000 ÷ P1,027,500 11.2%

43. 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

44. Answer: A

P/E Ratio: P30 ÷ 1.766 17.0 times

45. 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

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