Page 1 of 5 | MANAGEMENT ADVISORY SERVICES Handouts No.

04

FINANCIAL STATEMENT ANALYSIS

RHAD VIC F. ESTOQUE, CPA, MBA, CAT, MICB, RCA, CMA

Financial Statement Analysis

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

I. OVERVIEW
Financial statement analysis involves the assessment and evaluation of the firm's past performance, its present
condition, and future business potentials. The analysis serves to provide information about the following:
1. Profitability of the business firm;
2. The firm's ability to meet its obligations;
3. Safety of the investment in the business;
4. Effectiveness of management in running the firm; and
5. Over-all company marketability

II. ANALYTICAL TOOLS AND TECHNIQUES:

1. Analysis of variation in gross profit and net income
2. Cash flow statement
3. Vertical analysis (common size statements)
4. Horizontal analysis (trend ratios and percentages)
5. Financial ratios (ratio analysis

DIFFERENT RATIOS FOR DIFFERENT USERS:

III. TESTS OF LIQUIDITY

1. Current Ratio = Current Assets / Current Liabilities
*Working Capital = Current Assets – Current Liabilities

2. Acid Test Ratio = Quick Assets* / Current Liabilities

3. Cash Ratio = Cash and Marketable securities / Current Liabilities

4. Working capital activity ratios (turnovers):

a. Receivable Turnover= Net Credit Sales* / Ave. Receivables
Average age of receivables = No. of working days in yr. / Receivables turnover

b. Inventory Turnover:
Inventory Turnover = Cost of goods sold / Ave. Mdse. Inventory
Average Age of Inventory = Number of Working Days / Inventory Turnover

Operating Cycle = Ave. Age of Rec. + Ave. Age of Invent.

c. Trade Payables Turnover = Net Credit Purchases / Ave. Trade Payables

Ave. age of trade payables = No. of working days / Payables Turnover

d. Cash flow cycle = Operating cycle - Ave. age of trade payables

e. Current Assets Turnover = Cost of Sales + Operating Expenses (excluding depreciation and
amortization) / Average Current Assets

5. Working capital to total assets = Working Capital / Total Assets

6. Working Capital Turnover = Net Sales / Average Working Capital

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW

(074) 665 6774 0916 840 0661 admin@reo.com.ph MAY 2021 CPA REVIEW SEASON
 Page 2 of 5 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

FINANCIAL STATEMENT ANALYSIS

IV. TESTS OF SOLVENCY

1. Times Interest Earned =Income before tax + Interest expense / Interest Expense

2. Debt-Equity Ratio = Total Liabilities / Total Owners' or Stockholders' equity

Equity multiplier = Total Assets/Total Owners’ equity

3. Debt Ratio = Total Liabilities / Total Assets

4. Equity Ratio = Total Owner's or Stockholders' Equity / Total Assets

5. Fixed Assets to Long-term Liabilities = Fixed Assets / Long-term liabilities

6. Fixed Assets to Total Equity = Fixed Assets / Total Equity

7. Fixed Assets to Total Assets = Fixed Assets (Net) / Total Assets

8. Sales to fixed assets (plant turnover) = Net Sales / Fixed Assets (Net)

9. Book value per share on common stock = Common stock equity / # of outstanding common
stock

10. Times Preferred Dividend requirements = Net income After Taxes / Preferred Dividend
Requirements

11. Times Fixed Charges Earned

= Net income before taxes and fixed charges /
Fixed charges (rent + interest + Sinking fund payment before taxes)

12. Sinking fund payments bef. Tax = Sinking fund payment after taxes / 1 - Tax Rate

V. TESTS OF PROFITABILITY
1. Return on Sales = Earnings After Tax / Net Sales
Gross Profit/Margin Ratio = Gross Profit / Net Sales

2. Return of Total Assets (ROA) = Income before Interest but after taxes / Average total assets

3. Return on Owners' equity = Earnings After Tax / Ave. Owners' Equity

4. Earnings Per Share = Earnings After Tax - Preferred Dividends (in any)
Weighted Ave. Number of Common Shares

5. Rate of Return on Current Assets = Earnings After Tax / Average Current Assets

6. Rate of Return Per turnover of current Assets

= Rate of Return on Ave. Current Assets / Current Assets Turnover
- Shows profitability of each turnover of current assets.

VI. MARKET TESTS:

1. Price/Earnings Ratio (P/E) = Price Per Share / Earnings Per Share

2. Dividend Yield = Ordinary Dividend Per Share / Price Per Share

3. Dividend Pay-out = Ordinary Dividend Per Share / Earnings Per Share

4. Plow-back ratio= 1- Payout Ratio

5. Earnings Yield = Earnings Per Share / Price Per Share

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 admin@reo.com.ph MAY 2021 CPA REVIEW SEASON
 Page 3 of 5 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

FINANCIAL STATEMENT ANALYSIS

ILLUSTRATIONS AND EXERCISES

1. The Wilson Corporation has the following relationships: Sales/Total assets = 6; Return on assets (ROA) = 10%; Return
on equity (ROE) = 21%. What is Wilson’s net profit margin?
a. 2.39% b. 3.50% c. 1.67% d. 2.96% e. 1.55%

2. Moss Motors has P272 million in assets, and its tax rate is 40%. The company’s basic earning power (BEP) ratio is 41%,
and its return on assets (ROA) is 11%. What is Moss’ times-interest-earned (TIE) ratio?
a. 2.03 b. 0.49 c. 0.81 d. 1.81 e. 0.38

3. AAA's inventory turnover ratio is 11.09 based on sales of P15,200,000. The firm's current ratio equals 3.22 with current
liabilities equal to P970,000. What is the firm's quick ratio?
a. 1.81 b. 3.22 c. 2.63 d. 1.02 e. 3.97

4. Last year YYY Company had a 9.00% net profit margin based on P22,000,000 in sales and P15,000,000 of total assets.
During the coming year, the president has set a goal of attaining a 14% return on total assets. How much must firm sales
equal, other things being the same, for the goal to be achieved?
a. P23,333,333 b. P22,000,000 c. P26,722,967 d. P25,603,667

Net Credit sales for year 20x9 amounted to P7,600,000 and P6,660,000 for 20x8. Assuming there are 300
business days in a year.
12/31/20x9 12/31/20x8
Cash P 340,000 P 180,000
Accounts receivable, net 900,000 1,000,000
Merchandise inventory 1,080,000 840,000
Short-term investments 160,000 80,000
Plant and equipment, net 2,000,000 2,000,000
Prepaid expenses 60,000 50,000
Serial Bonds payable-currently due 500,000 500,000
Accounts Payable and accrued expenses 480,000 440,000
Bank note payable-current 290,000 280,000

5. Roy’s current ratio at December 31, 20x9 is

a. 1.83 to 1 b. 1.95 to 1 c. 2.o to 1 d. 3.30 to 1

6. Roy’s acid-test (quick) ratio at December 31, 20x9 is

a. 1.10 to 1 b. 1.83 to 1 c. 2.0 to 1 d. 3.30 to 1

7. Roy’s average days in accounts receivable for year 20x9 is

a. 35.5 days b. 37.5 days 40.0 days d. 45.0 days

The following items are based on the following pertaining to AXE Company’s selected data for year 20x9:
Operating income P 1,100,000
Interest expense 100,000
Income before income tax P 1,000,000
Income tax expense 330,000
Net income P 670,000
Common stock dividends P 200,000
Preferred stock dividends 200,000

8. The number of times interest earned is

a. 11.0 times b. 10.0 times c. 7.7 times d. 6.7 times

9. The number of times preferred dividend earned is

a. 5.5 times b. 5.0 times c. 3.35 times d. 2.75 times

10. MM Company uses the allowance method for bad debts. During the year, MM charged P60,000 to bad debts
expense, and wrote-off P50,400 of un-collectible accounts receivable. These transactions resulted in a decrease in
working capital of
a. None b. P9,600 c. P50,400 d. P60,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 admin@reo.com.ph MAY 2021 CPA REVIEW SEASON
 Page 4 of 5 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

FINANCIAL STATEMENT ANALYSIS

11. GC Company declared cash dividends of P20,000 on October 14. This dividends is payable to stockholders to record
on November 10, and payment was made on December 2. As result of this cash dividends, working capital will increase
(decrease) on
October 14 November 10 October 14 November 10
a. None None c. P(20,000) None
b. P20,000 None d. P(20,000) P20,000

The following items are based on the following information for AP Company:

Accounts 2/31/20x9 12/31/20x8

Cash P 20,000 P160,000
Accounts receivable, net 100,000 300,000
Inventory 180,000 300,000
Marketable securities 60,000 20,000
Land and building, net 680,000 720,000
Mortgage payable 540,000 560,000
Accounts payable 140,000 220,000
Notes payable-trade 40,000 80,000

20x9 20x8
Cash sales P 3,600,000 P 3,200,000
Credit sales 1,000,000 1,600,000
Cost of goods sold 2,000,000 2,800,000

12. AP Company’s Acid-test ratio as of December 31, 20x9 is

a. 0.5 to 1 b. 0.7 to 1 c. 1.0 to 1 d. 2.0 to 1

13. AP Company’s Current ratio as of December 31, 20x9 is

a. 0.5 to 1 b. 0.7 to 1 c. 1.0 to 1 d. 2.0 to 1

14. AP Company’s accounts receivable turnover for year 20x9 is

a. 5 times b. 10 times c. 23 times d. 46 times

15. AP Company’s inventory turnover for year 20x9 is

a. 8.3 times b. 10 times c. 11.1 times d. 13.3 times

PEC Company registered accelerated increases in its net income, earning P875,000 in 20x8 to P2,520,000 in
year 20x9. Rate of return on current assets increased from 25% in 20x8 to 30% in year 20x9. Current asset turnover on
the other hand, went up to 2.67 times in year 20x9 from 2.45 times in 20x8.

16. The average investment in current assets for PEC Company in year 20x9 is
a. P3,215,000 b. P3,500,000 c. P8,400,000 d. P10,080,000

17. The cost of goods sold and operating expenses excluding depreciation in 20x8 amounted to
a. P8,575,000 b. P10,045,000 c. P12,045,000 d. P10,575,000

Selected information from VC Company’s accounting records is as follows:

Net accounts receivable at December 31, 20x8 P1,800,000
Net accounts receivable at December 31, 20x9 2,000,000
Inventories-December 31, 20x8 2,200,000
Inventories-December 31, 20x9 2,400,000
Accounts receivable turnover 5 times
Inventory turnover 4 times

18. VC Company’s gross margin for year 20x9?

a. P300,000 b. P400,000 c. P600,000 d. P800,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 admin@reo.com.ph MAY 2021 CPA REVIEW SEASON
 Page 5 of 5 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

FINANCIAL STATEMENT ANALYSIS

The CSC Company for the prior year that has maintained the following relationships among the data on its
financial statements.

Accounts receivable turnover 8 times

Inventory turnover 6 times
Gross margin on sales 40%
Net income to net sales 10%
Current ratio 3 to 1
Quick ratio 2 to 1
Quick assets: Cash – 8%; Marketable securities – 32%; Accounts receivable – 60%
Asset turnover 2 times
Ratio of total assets to intangible assets 20 to 1
Ratio of accumulated depreciation to cost of fixed assets 1 to 2
Net income for the year P240,000
Accounts were reconstructed based on the above information.

19. What is the balance of the cash account?

a. P50,000 b. P40,000 c. P70,000 d. P60,000

20. What is the inventory account balance?

a. P300,000 b. P250,000 c. P200,000 d. P240,000

21. What is the total cost of property and equipment?

a. P390,000 b. P585,000 c. P350,000 d. P500,000

22. VENUS Co.'s net accounts receivable were P500,000 at Dec. 31. 20x8 and P600,000 at Dec. 31, 20x9. Net cash
sales for 20x9 were P200,000. The accounts receivable turn-over for 20x9 was 5. What were VENUS's total net sales for
20x9?
a. P2,950,000 b. P3,000,000 c. P3,200,000 d. P5,500,000

The December 31, 20x9 balance sheet of EARTH INC. is presented below. This are the only accounts in
EARTH's balance sheet. Amounts indicated by a question mark (?) can be calculated from the additional information
given
ASSETS:
Cash P25,000
Accounts receivable (net) ?
Inventory ?
Property, plant and equipment net 294,000
432,000
LIABILITIES & STOCKHOLDERS'
EQUITY:
Accounts payable P ?
Income taxes payable (current) 25,000
Long-term debts ?
Common stock 300,000
Retained earnings P ?
P ?
ADDITIONAL INFORMATION:
Current ratio at year end 1.5 to 1
Total liabilities divided by total stock holders' equity .8
Inventory turnover based on sales & ending inventory 15 times
Inventory turnover based on CGS and ending inventory 10.5 times
Gross margin for 20x9 P315,000

23. What was EARTH's Dec. 31, 20x9, balance in trade accounts payable?
a. P67,000 b. P92,000 c. P 182,000 d. P207,000

24. What was EARTH's Dec. 31, 20x9 balance of retained earnings?
a. (P60,000) b. P60,000 c. (P132,000) d. P132,000

25. What was EARTH's Dec. 31, 20x9 balance in inventory accounts?

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 admin@reo.com.ph MAY 2021 CPA REVIEW SEASON
 Page 6 of 5 | MANAGEMENT ADVISORY SERVICES Handouts No. 04

RHAD VIC F. ESTOQUE, CPA MBA, CAT, MICB, RCA, CMA

FINANCIAL STATEMENT ANALYSIS

a. P21,000 b. P30,000 c. P70,000 d. P135,000

--- END OF HANDOUTS ---

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 admin@reo.com.ph MAY 2021 CPA REVIEW SEASON