Pamantasan ng Cabuyao

Katapatan Homes Subd., Brgy. Banay- Banay, City of Cabuyao, Laguna

Financial Statements Analysis and Cash Flows

PRELIM EXAM

Name: Score:
Course & Section: Date:

1. Horizontal and vertical analyses are techniques used by analysts in understanding the financial
statements of companies. Which of the following is an example of a vertical, common-size
analysis?

a. Commission expense in 2021 is 10% greater than it was in 2020 which serves as base year
b. A comparison in financial ratio between two or more firms in the same industry
c. A comparison in financial ratio between two or more firms in different industries
d. Commission expense in 2021 is 5% of sales

2. Jollibee incurred operating expenses amounting to P 265. The following information is also
available:

Prepaid expenses, 1/1 P 14

Accrued expenses, 1/1 40
Prepaid expenses, 12/31 21
Accrued expenses, 12/31 36

How much was the cash paid for operating expenses?

a. P 224
b. P 262
c. P 268
d. P 276

3. Short-term solvency is another term for

a. Liquidity
b. Stability
c. Profitability
d. Marketability

4. Which of the following ratios best measures short-term solvency?

a. Quick ratio
 b. Earnings per share
c. Creditors’ equity to total assets
d. Return on inventories

5. Mc Donald Company has current assets of P 400,000 and current liabilities of P 500,000. Mc
Donald Company’s current ratio would be increased by

a. The purchase of P 100,000 of inventory on account

b. The payment of P 100,000 of accounts payable
c. The collection of P 100,000 of accounts receivable
d. Refinancing a P 100,000 long-term loan with short-term debt

6. Shakey’s Corp. has an acid test ratio of 1.5. Which of the following will cause this ratio to
deteriorate?

a. Sale of equipment at a loss.

b. Sale of inventory on account.
c. Borrowing short-term loan from a bank.
d. Payment of cash dividends previously declared.

7. A company has a current ratio greater than 1:1 and a quick ratio less than 1:1. If all cash was used
to reduce accounts payable, how would these cash payments affect (1) current ratio (2) quick
ratio?

a. (1) Decreased (2) Decreased

b. (1) Decreased (2) Increased
c. (1) Increased (2) Decreased
d. (1) Increased (2) Increased

8. The issuance of serial bonds in exchange for a building, with the first installment of the bonds
due late this year:

a. Decreases net working capital

b. Decreases the current issue
c. Decreases the quick ratio
d. Affects all of the answers as indicated

9. If Jonas Co. decides to change from FIFO to LIFO inventory method during a period of rising
prices, its

a. Current ratio would be reduced

b. Debt-to-equity ratio would be reduced
c. Inventory turnover would be reduced
d. Cash flow would be reduced

10. Which cost flow assumption will result in a higher inventory turnover ratio in an inflationary
economy?
 a. FIFO
b. LIFO
c. Weighted average
d. Specific identification

11. A quick ratio of 2.0, current assets of P 5,000 and inventory of P 2,000 has current liabilities of
_____.

a. P 1,500
b. P 2,500
c. P 3,500
d. P 6,000

12. How is the average inventory balance used in the calculation of each of the following? Acid-test
ratio Inventory Turnover

a. Numerator Numerator
b. Numerator Denominator
c. Not used Denominator
d. Not used Numerator

13. Selected data from Starbucks are presented below. The difference between average and ending
inventories is immaterial. Current assets are comprised mainly of cash, receivables and
inventories.

Current ratio 2.0

Quick ratio 1.5
Current liabilities P 600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%

What were Starbuck's net sales for the year?

a. P 2.4 million
b. P 4.0 million
c. P 1.2 million
d. P 6.0 million

14. Based on the data presented below, what is Goldilock Corporation’s cost of sales for the year?

Current ratio 3.5

Acid test ratio 3.0
Year-end current liabilities P 600,000
Beginning inventory P 500,000
Inventory turnover 8.0
 a. P 1,600,000
b. P 2,400,000

c. P 3,200,000
d. P 6,400,000

Items 20-22 are based on the following information

2019 2020 2021

Accounts receivable, net P 40,000 P 42,500 P 45,000
Inventory 40,000 50,000 45,000
Current assets 120,000 140,000 130,000
Total assets, net 700,000 750,000 725,000
Current liabilities 70,000 80,000 50,000
Cash sales 400,000 420,000 450,000
Credit sales 120,000 125,000 131,250
Costs of sales 310,000 324,000 345,000

15. What should be the age of receivables in 2021?

a. 110 days
b. 120 days
c. 130 days
d. None of these

16. Determine the number of days in inventory for 2020.

a. 50 days
b. 60 days
c. 70 days
d. None of these

17. What is the net working capital turnover for 2021?

a. 9.9
b. 8.3
c. 7.15
d. None of these

18. The ratio of sales to working capital is a measure of

a. Collectibility
b. Financial leverage
c. Liquidity
 d. Profitability

19. A high sales-to-working-capital ratio could indicate

a. Unprofitable use of working capital

b. Sales are not adequate relative to available working capital
c. The firm is undercapitalized
d. The firm is not susceptible to liquidity problems

20. The number of days’ sales in receivable is a measure of

a. Asset value
b. Sales performance
c. Profitability
d. Liquidity

21. Accounts receivable turnover ratio will normally decrease as a result of

a. The write-off of an uncollectible account (assume the use of the allowance for doubtful
accounts method)
b. A significant sales volume decrease near the end of the accounting period
c. An increase in cash sales in proportion to credit sales
d. A change in credit policy to lengthen the period for cash discounts

22. To determine the operating cycle for a department store, which one of these pairs of items is
needed?

a. Days’ sales in accounts receivable and average merchandise inventory

b. Cash turnover and net sales
c. Accounts receivable turnover and inventory turnover
d. Asset turnover and return on sales

23. Selected information for 2021 for Tokyo Company is as follows:

Cost of goods sold P 5,400,000

Average inventory 1,800,000
Net sales 7,200,000
Average receivables 960,000
Net income 720,000

Assuming 360 days in a year, what was the average number of days in operating cycle for 2020?

a. 72 days
b. 84 days
c. 144 days

d. 168 days

24. Return on investment may be calculated by multiplying total asset turnover by

a. Average collection period

b. Profit margin
c. Debt ratio
d. Fixed-charge coverage

25. The following ratios were computed from Dads Company’s financial statements for 2020:

Return on asset 24%

Asset turnover 1.6 times

What was the company’s profit margin ratio?

a. 38.4%
b. 24%
c. 15%
d. 6%

26. Return on investment (RoI) is a term often used to express income earned on capital invested in a
business unit. A company’s RoI is increases if

a. Sales increase by the same peso amount as expenses and total assets
b. Sales remain the same and expenses are reduced by the same peso amount that total assets
increase
c. Sales decrease by the same dollar amount that expenses increase
d. Net profit margin on sales increases by the same percentage as total assets

27. If a company is profitable by effectively using leverage, which one of the following ratios is
likely to be the largest?

a. Return on total assets

b. Return on operating assets
c. Return on common equity
d. Return on total equity

28. RoA and RoE are measures of ______.

a. Solvency
b. Liquidity
c. Profitability
 d. Current asset activity

29. National Company’s return on equity is 12% and debt ratio is 0.40. Determine the return on
assets.

a. 5.35%
b. 8.4%
c. 6.60%
d. 7.20%

30. Selected information for Saisaki Company is as follows:

2019 2020
Preferred stock * P 125,000 P 125,000
Common stock 300,000 400,000
Retained earnings 75,000 185,000
Dividends paid on preferred stock for the year ended 10,000 10,000
Net income for the year ended 60,000 120,000
* 8%, P 100 par non-cumulative, non-convertible

What is Saisaki Company’s return on common stockholders’ equity for 2020?

a. 17%
b. 19%
c. 23%
d. 25%