Financial Ratios Problemswith Answers

Financial Ratio Analysis
Questions 1-4 are based on the following information:

Selected account balances of Matthew Company for two years are shown below:
2006 2005
Cash 25,500 26,000
Marketable Securities 12,000 12,000
Accounts Receivable (net) 120,000 160,000
Finished Goods 62,500 85,000
Work in process 45,000 62,000
Raw materials 22,000 25,000
Prepaid expenses 1,000 2,000
Accounts payable 80,000 90,000
Bank loan (short term) 10,000 20,000
Notes Payable ( long term) 110,000 50,000
1. How much is the net working capital for 2006?

a. P78,000 b. P87,000 c. P189,000 d. P 198,000
Answer: D
Net Working Capital =Current Assets – Current Liabilities
Cash 25,500
Marketable Securities 12,000
Accounts Receivable (net) 120,000
Finished Goods 62,500
Work in process 45,000
Raw materials 22,000
Prepaid expenses 1,000
Current Assets P288,000
Accounts payable 80,000

Bank loan (short term) 10,000
Current Liabilities P (90,000)
Net working capital P 198,000
2. What is the current ratio for 2006?

a. 1.44 to 1 b. 2.2 to 1 c. 2.3 to 1 d. 3.2 to 1
Answer: D
Current Ratio = Current Assets / Current Liabilities
= P288,000 /198,000
= 3.2
3. How much is the net monetary assets for 2005?

a. P88,000 b. P80,000 c. P48,000 d. P38,000
Answer: A
Net monetary asset = quick assets – current liabilities

Cash 26,000
Marketable Securities 12,000
Accounts Receivable (net) 160,000
Quick Assets P 198,000
Accounts payable 90,000

Bank loan (short term) 20,000
Current Liabilities P (110,000)
Net monetary assets P 88,000
4. What is the quick ratio for 2005?

a. 2.2: 1 b. 1.8:1 c. 1.2:1 d. 1.1:1
Answer: B
Quick ratio = Quick Assets / Current liabilities

P 198,000 / P 110,000 = 1.8
1
5. The net monetary assets of Mark Company are P17,250. The current liabilities are P75,000. Non-
quick assets are P47,250.
What is the working capital ratio? Acid-test ratio?

Working capital ratio Acid-test ratio
a. 1.68 1.23
b. 1.68 1.32
c. 1.86 1.23
d. 1.86 1.32
Answer: C

P17,250 = quick assets - P75,000
Quick assets = P92,250
Current Assets = P92,250 + P47,250

= 139,500
Working capital ratio = Current Assets / Current Liabilities

= P139,500 / P75,000
= 1.86
Acid test ratio = Quick Assets / Current liabilities

= P92,250 / P75,000
= 1.23
6. The net working capital of Luke Company is P240,000. The total current assets are P720,000
( including inventories and prepaid expenses of P144,000).
What is the current ratio? Quick ratio?

Current Ratio Quick Ratio
a. 1.2 1.0
b. 1.5 1.2
c. 2.1 1.5
d. 2.5 1.2
Answer:
P240,000 = P720,000 - Current Liabilities
Current liabilities = P480,000

= P720,000 / P480,000
= 1.5
Quick assets = Total current assets – inventories and prepaid expenses

= P720,000 – P144,000
= P576,000

= P576,000 / P480,000
= 1.2
7. John Company has a current ratio of 3 to 1 and a quick ratio of 1.8 to 1. The quick assets are
P23,400.
How much is the net working capital?

a. P39,000 b. P36,000 c. P26,000 d. P10,400
Answer: C
Solve for current liabilities:

1.8 = P23,400/ Current liabilities
Current liabilities = P13,000*
Solve for current assets:

3 = Current assets / P13,000* (computed above)
2
Current assets = P39,000

Net working capital = P39,000 - P13,000
= 26,000
8. Acts Company has current assets of P216,000. The current ratio is 1.5 and the quick ratio is 0.85.
How much is the net monetary assets?

a. P26,100 b. P(21,600) c. P20,610 d. P21,600
Answer: B

1.5 = P216,000 / Current liabilities
Solve for quick assets:

0.85 = Quick Assets / P144,000*

= P122,400 - P144,000
= P (21,600)
9. The current assets of Romans Company is P240,000. The current ratio is 4 and the acid-test ratio is
1.75.
How much are the current assets and quick assets?

Current Assets Quick Assets
a. P240,000 P105,000
b. 320,000 140,000
c. 240,000 360,000
d. 960,000 480,000
Answer:
4 = P240,000 / Current Liabilities
Solve for quick assets:

1.75 = Quick Assets / P60,000*
Current assets was already given.
10. Corinthians Company has a current ratio of 1.75 to 1. The minimum current ratio the company wants
to maintain is 1.5 to 1. Its current liability at present are P250,000. Management wants to borrow
money on a short-term basis to finance inventory expansion.
What is the maximum amount of short term loan the company can borrow to finance the
inventory expansion and maintain the minimum current ratio?
a. P 100,000 b. P120,000 c. P125,000 d. P150,000
Answer: C

1.75 = Current Assets / P250,000
Current assets = P437,500
Solve for the amount to be borrowed:

Let x = amount to be borrowed
3
1.5 = (P437,500 + x)/ ( P250,000 + x)
Equate:
375,000 + 1.5x = P437,500 + x
Simplify:
62,500 = 0.5 x
x = 125,000
11. Galatians Company provides you with the following information concerning its receivables:
2005 2006
Credit sales P1,000,000 P1,200,000
Account Receivable (net) 100,000 200,000
There are 360 working days during the year.
What is the accounts receivable turnover and the average collection period for 2006?
Turnover Age of Receivables

a. 8.00 x 60 days
b. 6.25 x 50 days
c. 8.00 x 45 days
d. 10.00 x 36 days
Answer: C
Receivable turnover = Credit sales / Average receivable

= P1,200,000 / (100,000 + 200,000)/ 2
= 8 times
Age of receivables = 360 / Receivable turnover

= 360 / 8
= 45 days
12. Credit sales for Ephesians Company are P274,200. On the average, the accounts receivable remain
uncollected for 73 days. The company operates 365 days in a year.
What is the accounts receivable balance at the end of the year?
a. P27,420 b. P37,600 c. P54,840 d. P120,000
Answer: C
Solve for receivable turnover:

73 = 360 / Receivable turnover
Receivable turnover =5
Solve for accounts receivable:

5 = P274,200 / Average receivable
Average receivable = P54,840
Since there was no beginning receivable given, the average receivable is equal to the ending
accounts receivable.
13. Philippians Company has told you that the accounts receivable balance at the end of the year is
P60,000 and that the average collection period is 50 days. There are 300 business days during the
year.
How much are the credit sales during the year?
a. P330,000 b. P360,000 c. P530,000 d. P630,000
Answer: B
Solve for receivable turnover:
Solve for credit sales:

6 = Credit sales / P60,000
Credit sales = P360,000
4
14. The accounts receivable turnover of Colossians Company decreased from 10 times last year to only
8 times this year. The average accounts receivable for both years remained at P60,000.
What was the decrease in sales between the two years?

a. P30,000 b. P50,000 c. P80,000 d. P120,000
Answer: D
Solve the sales for the two years:
Last year
This year
Decrease in sales:
Last Year P600,000
This Year P480,000
P120,000
15. Sales for Thessalonians Company for two years are almost identical at P180,000. If the receivables
turnover decreased from 12.5 to only 6 times, what is the increase in the average accounts
receivable?
a. P15,000 b. P15,600 c. P16,400 d. P16,600
Answer: B
Solve the average accounts receivable for the two years:
Last year
12.5 = P180,000 / Average receivable
This year
6 = P180,000 / Average receivable
Increase in account receivable:

Last Year P14,400
This Year P30,000
P15,600
16. In 2005, Timothy Company had a receivable turnover of 8 times and credit sales of P3,600,000. The
accounts receivable balance on Jan. 1 was P400,000. There are 300 business days during the year.
What was the accounts receivable balance on December 31?

a. P400,000 b. P450,000 c. P500,000 d. P600,000
Answer: C
Solve for ending receivable balance:

Let x = ending receivable
8 = P3,600,000 / Average receivable
8 = P3,600,000/ {(P400,000 + x )/ 2}
3,200,000 + 8x = P3,600,000 (2)
Simplify:
8x = 4,000,000
x = P500,000
5
17. Titus Company’s sales for the coming years are P96,000,000 of which 80% are on terms n/30. The
company estimates that a proposed relaxation of credit would increase credit sales by 30% but
increase the average collection period from 30 to 45 days.
There are 360 working days during the year.
What would be the increase in accounts receivable?

a. P1.92 M b. P2.88 M c. P6.08 M d. P6.88 M
Answer: C
Solve for receivable turnover using the formula for age of receivables:
This year
Receivable turnover = 12
Coming year
Solve the receivable for two years:

This year
Credit sale = P96,000,000 x 80%
= P76,800,000

12 = P76,800,000/ Average receivable
Average receivable = P6,400,000
Coming year
Credit sale = P76,800,000x 130%
= P99,840,000

8 = P99,840,000/ Average receivable
Average receivable = P12,480,000
Increase in account receivable:

This Year P 6,400,000
Coming Year P12,480,000
P 6,080,000
18. The following data concerning receivables are provided by Philemon Company:
Credit sales P1,200,000

Credit terms 2/10, n/40
70% of credit sales are collected within the discount period and 30% are collected after the
discount period. There are 300 business days during the year.
What is the outstanding accounts receivable balance at the end of its first year of operations?
a. P28,000 b. P48,000 c. P67,000 d. P76,000
Answer: D
Within the discount period

Receivable turnover = 30
Credit period (after the discount period)

Receivable turnover = 7.5
6
Solve the accounts receivable considering the percentage of collection:
Within the discount period:
Receivable turnover = (Credit sales x 30% )/ Average receivable

30 = P1,200,000 x 30%/ Average receivable
Within Credit period (after discount period)

Receivable turnover = (Credit sales x 70%) / Average receivable
7.5 = (P1,200,000 x 70%)/ Average receivable
Ending account receivable:
Within the discount period P48,000

Within Credit period (after discount period) P28,000
P76,000
19. Hebrews Company has sales of P1.2 million under the terms 3/10, n/30. The collection manager
estimates that 30 % of the customers pay on the 10 th day and take discounts; 40% on the 30 th day;
and 30% on the 40th day after the purchase. If management would toughen on its collection policy
and require that all non-discount customers pay on the 30 th day, what would be the accounts
receivable balance? (use 360 days)
a. P0 b. P60,000 c. P70,000 d. P80,000
Answer: D
(1.2 M x 70%) / (360 / 30)* = P70,000

(1.2 M x 30%) / (360/10) * = 10,000
P80,000 account receivable balance
* equivalent to receivable turnover
20. James Company sells on terms 3/10, n/30. Gross sales for the year are P2.4 M and the collection
department estimates that 20% of the customers pay on the 10 th day and take discounts; 30% on
the 40th day; and the remaining 50% pay on the average in 60 days after the purchase. The
company operates 360 days in a year.
What is the average collection period?

a. 20 days b. 37 days c. 40 days d. 44 days
Answer: D
20% x 10 = 2
30% x 40 = 12
50% x 60 = 30
44 days
Questions 21 and 22 are based on the following information:

Company D Company E
Net credit sales P384,000 P160,000
Gross profit rate 20% of sales 25% of cost of sales
Beginning inventory P21,000 P18,000
Ending inventory P27,000 P14,000
21. The inventory turnover for Company D is :

a. 18 x b. 12.8 x c. 12 x d. 4 x
Answer: B
Inventory turnover = cost of goods sold / average inventory
Company D
(P384,000 x 80%) / (P21,000 + 27,000) = 12.8 times
22. The average age of inventory of Company E assuming a 360-day year is:
a. 37.5 days b. 4o days c. 45 days d. 50 days
7
Answer:
Company D
(P160,000 / 125%) / (P18,000 + 14,000) = 8 times*
Age of inventory = 360 / Inventory turnover

= 360/ 8 times*
= 45 days
23. Peter Company has an average inventory of P15,000 which takes 30 days to sell. There are 360
working days during the year.
How much is the cost of sales?

a. P100,000 b. P120,000 c. P180,000 d. P200,000
Answer: C
Cost of goods sold = average inventory x inventory turnover
= P15,000 x (360/30)
= P180,000
24. The inventory turnover of Jude Company increased from 7.5 times last year to 12.5 times this year.
The average inventory remained at P64,000 for both years.
How much was the increase in cost of sales?

a. P300,000 b. P320,000 c. P360,000 d. P400,000
Answer: B
Last year
= P64,000 x 7.5
= P480,000
This year = P64,000 x 12.5

= P800,000
Last Year P480,000

This Year P800,000
Increase P320,000
25. In its first year of operations, Genesis Company had total sales of P900,000 of which 10% was
cash sales. The gross profit rate was 20% of sales. During the year, the company operated 360
days. The inventory on the average remained unsold for 30 days.
What is the ending inventory?

a. P40,000 b. P45,000 c. P60,000 d. P67,500
Answer: C
Inventory turnover = 360 /30
= 12 times
Ending inventory = Cost of goods sold / Inventory turnover

=( P900,000 x 80%) / 12
= P60,000
26. Exodus Company’s sales of P864,000 are made at a gross profit rate of 25% of costs of sales. The
average age of inventory is 100 days. There are 360 days during the year. The beginning inventory
is P190,000.
What is the ending inventory?

a. P170,000 b. P174,000 c. P184,000 d. P194,000
Answer: D
Inventory turnover = 360 /100

= 3.6 times
Average inventory = Cost of goods sold / Inventory turnover

=( P864,000/ 125%) / 3.6
= P192,000
8
Let x = ending inventory
average inventory = (beginning inventory + ending inventory) / 2
192,000 = (190,000 + x) / 2
384,000 = 190,000 + x
x = 194,000
27. Leviticus Company has cost of sales of P420,000. To decrease the investment in inventory the
company will increase its inventory turnover from 7 times to 12 times .
What will be the decrease in inventory?

a. P20,000 b. P25,000 c. P50,000 d. P75,000
Answer:
Ending inventory = cost of sales / inventory turnover
P420,000 / 7 = P60,000
P420,000 / 12 = P35,000
P25,000
28. During 2005, Numbers Company purchased P1,800,000 of inventory. The cost of goods sold was
P2,000,000 and the ending inventory was P400,000. There are 360 days during the year.
What was the average age of inventory?

a. 15 days b. 37.5 days c. 45 days d. 90 days
Answer: D
Compute first the beginning inventory:

Beginning inventory ? 600,000 worked back
Purchases 1,800,000
CoGAS 2,400,000
Less: Ending Inventory (400,000)
Cost of goods sold P2,000,000
Inventory turnover = P2,000,000 / {(600,000 + 400,000) /2}

= 4 times
Average age of inventory = 360 / inventory turnover
= 360 / 4 times
= 90 days
29. Deuteronomy Company had almost identical cost of sales of P90,000 for two years but the average
inventory declined from P12,000 to P4,500. There are 300 business days during the year.
What was the decrease in the average age of inventory?

Answer: B
Year 1 90,000 / 12,000 = 7.5 times

Year 2 90,000 / 4,500 = 20 times
Age of inventory
Year 1 300 / 7.5 = 40
Year 2 300/20 = 15
25 days ( Decrease in average age of inventory)
30. Joshua Company has credit sales of P240,000 with a gross profit rate of 20% of cost of sales. It has
an average receivable of P16,000 and an average inventory of P20,000. There are 300 business
days during the year.
How many days is the operating cycle?

Answer: C
Receivable turnover
240,000/16,000 = 15 times
Age of receivable
300/ 15 = 20 days
9
Cost of sales
240,000 / 120% = 200,000
Inventory turnover
200,000/ 20 = 10 times
Day’s inventory
300 / 10 = 30 days
Operating cycle:
20 days + 30 days = 50 days
31. Selected information from the accounting records of Judges Company is as follows:
Beginning Balance Ending Balance
Net accounts receivable P90,000 P100,000
Inventories P110,000 P120,000
Accounts receivable turnover 5x
Inventory turnover 4x
What was the gross profit of the company?

a. P15,000 b. P20,000 c. P25,000 d. P40,000
Answer: A
Sales = average receivable x receivable turnover
Sales = {(P90,000 + P100,000) / 2} x 5 times
= P475,000
Cost of sales = average inventory x inventory turnover

Cost of sales = {(110,000 + 120,000)/ 2} x 4 times
= P460,000
Sales P475,000
Cost of sales 460,000
Gross Profit P 15,000
32. The following data are available for Kings Corporation for the year 2005:
Current ratio 3.5 Current liabilities – 12/31/2005 P600,000
Quick ratio 3.0 Inventory – 12/31/2004 500,000
Inventory turnover 8.0 Gross profit rate 20% of sales
Based on the above data, what is the gross profit for 2005?
a. P500,000 b. P800,000 c. P1,200,000 d. P1,600,000
Answer: B
Current assets = current liabilities x current ratio

= P600,000 x 3.5
= 2,100,000
Quick assets = current liabilities x quick ratio

= P600,000 x 3.0
= 1,800,000
Current assets 2,100,000

Quick assets 1,800,000
Inventory,end 300,000
Inventory turnover = Cost of goods sold / average inventory

8.0 = cost of goods sold / { (300,000 + 500,000)/2}
Cost of goods sold = 400,000 x 8

= 3,200,000
Sales = Cost of goods sold / 80%

= 3,200,000 / 80%
= 4,000,000
10
Sales 4,000,000
CGS 3,200,000
Gross Profit 800,000
33. Chronicles Company carries an average inventory of P147,000 which it turns over 4 times a year at
a gross profit rate of 30% of sales. Market survey indicates that a reduction in selling price of 5% will
result in 6 turnovers a year.
By how much will gross profit increase?

a. P88,200 b. P63,000 c. P31,500 d. P25,200
Answer:

= P147,000 x 4 times
= P588,000
Sales = P 588,000 / 70%

= P 840,000
Sales P840,000
CGS P588,000
Gross Profit P252,000
New gross profit rate after 5% decrease in selling price

sales 95%
cost of goods sold 70%
gross profit 25%
Gross profit rate = 25% / 95%

= 26.32%
Cost of goods sold rate = 100% - 26.32

= 73.68%
Proposed Cost of goods sold = average inventory x inventory turnover
= 147,000 x 6 times
= 882,000
Proposed sales = P882,000 / 73.68%
= P1,197,000 (rounded off)
Proposed sales P1,197,000

Proposed Cost of goods sold 882,000
Proposed Gross Profit P 315,000
Increase in Gross Profit

Gross Profit (old) P 252,000
Proposed Gross Profit P 315,000
Increase in gross profit P 63,000
December 31
2004 2005
Finished goods inventory P30,000 P50,000
Goods in process inventory 40,000 48,000
Raw materials inventory 20,000 30,000
Year ended
December 31, 2005
Sales P450,000
Conversion costs 212,000
Gross profit rate 21 1/3% of sales
34. The finished goods turnover is:

a. 8x b. 8.25 x c. 8.75 x d. 8.85 x
Answer: D
finished goods turnover = cost of goods sold / average finished goods
= 354,000 / {(30,000 + 50,000) /2}
= 8.85 x
11
35. The goods in process turnover is :
a. 8 x b. 8.25 x c. 8.5 x d. 8.75 x
Answer: C
Goods in process turnover = cost of goods manufactured / average goods in process
= 374,000 / {(48,000 + 40,000) /2}
= 8.5 x
36. The raw materials turnover is:

a. 5.8 x b. 6.8 x c. 7.8 x d. 8.6 x
Answer: B
Goods in process turnover = raw materials used / average raw materials
= 170,000 / {(20,000 + 30,000) /2}
= 6.8 x
Raw materials, beginning 20,000

Add: Purchases 180,000
Total materials available 200,000
Less: Raw materials, ending 30,000
Raw materials used 170,000
Add: Conversion cost 212,000
Total manufacturing cost 382,000
Add: Goods in process, beginning 40,000
Total goods placed in process 422,000
Less: Goods in process, ending 48,000
Cost of goods manufactured 374,000
Add: Finished goods, beginning 30,000
Cost of goods available for sale 404,000
Less: Finished goods, ending 50,000
Cost of goods sold 354,000*
Sales x 78.67% = 354,000*
Management of Ezra Manufacturing is worried about the liquidity of its current assets. You are furnished
the Income Statement for the year ended December 31, 2005 for your analysis:
Sales( all on credit) P1,200,000

Cost of sales:
Raw materials beginning P14,200
Purchases 579,600
Materials available for use 593,800
Raw materials end 17,800
Raw materials used 576,000
Conversion costs 320,000
Manufacturing costs 896,000
Beginning work in process 62,000
Costs placed in process 958,000
Ending work in process 58,000
Cost of goods manufactured 900,000
Finished goods beginning 40,000
Goods available for sale 940,000
Finished goods end 100,000 840,000
GROSS PROFIT 360,000
Expenses 125,000
NET INCOME P235,000
37. What is the average collection period if the average accounts receivable is P50,000? (Use 360 days)
Answer: B
Average collection period = 360 / receivable turnover
= 360 / (1,200,000 / 50,000)
= 360 /24
= 15 days
12
38. How many days does it take the company to sell the finished goods?
Answer: C
= 840,000 / {(100,000 + 40,000) / 2}
= 12
Day’s inventory = 360 / inventory turnover

= 360 / 12
= 30 days
39. How many days does it take to finish the work in process?
Answer: B
work in process turnover = Cost of goods manufactured / average goods in process
= 900,000 / {(62,000 + 58,000)/2}
= 900,000 / 60,000
= 15 times
Day’s work in process = 360 /15

= 24 days
40. What is the age of raw materials?

a. 10 days b. 15 days c. 20 days d.25 days
raw materials turnover = raw materials used / average raw materials
= 576,000 / {( 14,200 + 17,800)/2}
= 576,000 / 16,000
= 36
Day’s material = 360 / 36

= 10 days
41. How many days will it take to convert raw materials into cash?
Answer:
Average collection period 15
Day’s inventory 30
Day’s work in process 24
Day’s materials 10
79 days
42. During the year 2005, Nehemiah Company made payments for materials (all within the discount
period) in the amount of P402, 192. All purchases of materials were on a 2/10, n/30 terms. The accounts
payable balance on January 1, 2005 was P28,800 and it increased by P9,600 on December 31, 2005.
There are 300 business days during the year.
What was the accounts payable turnover and the average payment period?
Turnover Age of payable
a. 10x 30 days
b. 12 x 25 days
c. 12.5 x 25 days
d. 12.5 x 24 days
Answer:
Accounts payable turnover = Purchases* / average account payable**
= P420,000 / P 33,600
= 12.5 times
Age of payable = 300 / 12.5

= 24 days
Purchases = (P402,192 / 0.98) + P9,600

= P410,400 + P9,600
= P420,000*
Average accounts payable = P28,800 + (28,800+ 9,600) / 2
= P33,600**
13
43. In 2005, Esther Company had the following balances:
Beginning Ending
Total Assets P500,000 P480,000
Common Stock 180,000 180,000
Retained Earnings 120,000 98,400
What is the debt-ratio? Equity ratio

Debt ratio Equity ratio
a. 40% 60%
b. 41% 59%
c. 42% 58%
d. 58% 42%
Answer: C
Total debt = Total Assets – (Common stock + retained earnings)

= 480,000 – 278, 400
= 201, 600
Debt ratio = total debt/ total assets

= P201,600 / P480,000
= 42%
Equity ratio = 1- 42%

= 58%
44. Job Company has a net working capital of P2,450,000 and a current ratio of 4.5 to 1. Other assets
are P4,850,000. The stockholder’s equity section of the balance sheet shows the following:
Common stock P3,000,000

Retained Earnings 1,800,000
What is the equity-debt ratio?

a. 1.25 b. 1.5 c.1.75 d.2.25
Answer: B
Net working capital = current assets – current liabilities

3.5 = 4.5 - 1
Net working capital = 2450,000
Current assets = 2,450,000 / (3.5/4.5)

= 3,150,000
Total assets = current assets + other assets

= 3,150,000 + 4,850,000
= 8,000,000
Total liabilities = Total assets – Total Equity

= 8,000,000 – 4,800,000
= 3,200,000
Equity – debt ratio = 4,800,000 / 3,200,000

= 1.5
45. Psalms Trading has P1,500,000 of 12% bonds outstanding secured by the company’s land and
building. The land had a cost of P1,400,000 and the building, P1,500,000. The building has a book value
of P1,350,000. The company has a sinking fund for the retirement of the bonds in the amount of
P1,000,000.
What is the ratio of the total securities to the bond issue?

a. 1.83 b. 1.93 c. 2.5 d. 2.6
Answer: C
Land 1,400,000
Building 1,350,000
Sinking fund 1,000,000
Total securities 3,750,000
Ratio of securities to bond issue = 3,750,000 / 1,500,000

= 2.5
14
46. Proverbs Corporation furnished you with the following information:
Earning after taxes P18,000
Income taxes 12,000
Interest expense 80,000
Net sales 620,000
Operating expenses 50,000
How many times was interest earned?

a. 1.735 b. 1.537 c. 1.357 d. 1.375
Answer: D
Times interest earned
= Net income before interest and tax / interest expense
= 110,000 / 80,000
= 1.375
Net sales P620,000

Gross Profit P160,000
Operating expenses 50,000
Operating income P110,000
Or
= Earning after taxes + interest expense + income tax
= P18,000 + P80,000 + P12,000
= P110,000
Earnings before interest and tax is the same as operating income.
47. Ecclesiastes Company earned P18, 720 income after taxes. Income taxes are 40% of the net income
before taxes. The following data are outstanding:
12% Mortgage payable P8,000
16% Debenture bonds 15,000
8% Notes Payable 10,000
The annual coverage of the firm’s debt is:

a. 6.5 b. 7.25 c. 7.5 d. 8.5
Answer: D
P8,000 x 12% = 960

15,000 x 16% = 2,400
10,000 x 8% = 800
4,160
Annual coverage = (Income before tax + interest) / interest

={(P18,720 / 0.60) + (4,160)} / 4,160
= (31,200 + 4,160) / 4,160
= 8.5
48. Data from Songs Corporation’s financial statements for 2005 are presented below:
Net sales P4,175,000
Cost of goods sold 2,880,000
Income tax 120,000
Gain on disposal of a segment (net of tax) 210,000
Net Income 385,000
What was the number of times interest was earned?
a. 4.5 b. 3.5 c. 7.7 d. 6.9
Answer: D
= (385,000 - 210,000 + 120,000 + 50,000 ) / 50,000

= 345,000 / 50
= 6.9 times
15
49. Isaiah Company provided you with the following data:
Earnings after taxes P3,000,000

Income taxes 1,000,000
Annual principal payments on long term debts 1,500,000
The debt service coverage ratio is :

a. 3x b. 2x c. 1.8 x d. 1.5x
Answer:
Debt service coverage ratio
=Earnings before income and tax / Interest + (principal / 1-tax rate)
= (P3,000,000 + P1,000,000 + P500,000) / 500 + ( 1,500,000/ 1- 25%*)
= 4,500,000 / (500 + 2,000,000)
= 1.8
Earnings after taxes P3,000,000

Income tax 1,000,000
Earnings before tax P4,000,000
1,000,000 / 4,000,000 = 25%*

Earnings after taxes P124,480
Income taxes 20%
4% Bonds payable P100,000
Common shares outstanding 2,000
6% Preferred stock P200,000
Total dividends declared 96,360
Market value per share of common stock P168.72
50. The times interest earned ratio is:

a. 31.12x b. 31.21 x c. 38.90x d. 39.90 x
Answer: D
Earnings before tax = 124, 480 / 80%
= 155,600
Interest expense from bonds payable = P100,000 x 4%

= P 4,000
= (155,600 + 4,000)/ 4,000
= 39.9 times
51. The number of times preferred dividend is earned

a. 9.33 b. 10.33 c. 10.37 d. 11.37
Answer: C
Preferred dividend = P200,000 x 6%
= P12,000
number of times preferred dividend is earned = Earnings after taxes / preferred dividend
= 124,480 / 12,000
= 10.37
52. The dividend payout ratio is:
a. 68% b. 70% c. 72% d. 75%
Answer: D
= Dividend per share / Earnings per share
= 42.18 / 56.24
= 75%
53. The earnings per share to be reported will be:

a. P52.64 b. P54.62 c. P56.24 d. P56.42
Answer: A
Earnings per share = Net income after preferred dividend / common shares outstanding
= (124,480 – 12,000) / 2,000 shares
= 56.24
16
54. The earnings-price ratio is:
a. 16 2/3% b. 33 1/3 c. 66 2/3 d. 75%
Answer: B
Earnings-price ratio
=Earnings per share / Market value per share of common stock
= 56.24 / 168.72 (given)
= 33 1/3 %
55. The dividends per share would amount to:

a. P41.28 b. 41.82 c. 42.18 d. 42.81
Answer: C
Dividend per share
=Dividend for common stock / number of common shares outstanding
=( 96,360 – 12,000) / 2,000 shares

= 42.18
56. The yield on common stock is

a. 12.5% b. 20% c. 25% d. 50%
Answer:
Yield on common stock
= Dividend per share / market value of common stock
= 42.18 / 168.72
Company Jeremiah earned net income after taxes of P10.6 M in 2005. Included in the computation of the
net income was P1M of bond interest expense related to its long-term debt. Income tax rate was 20%.
Dividends on preferred stock were P600,000. The dividend payout ratio on common stock was 40%.
There were 2,000,000 outstanding common shares.
57. The times interest earned was:
a. 12.45 x b. 12.54 x c. 14.25 x d.15.24x
58. The number of times preferred dividend was earned

a. 16.7 b. 17.6 c. 17.7 d. 18.7
59. The earnings per share would be:

a. P2.00 b. P2.50 c. P4.00 d. P5.00
60. The dividends per share amounted to:

a. P2.00 b. P2.50 c. P4.00 d. P5.00
61. Information concerning Lamentations Company’s common stock follows:
Book value per share at 12/31/2005 P12/share

Market value at 12/31/2005 9/share
Earnings per share for 2005 3/share
Par value per share 2/share
Dividends per share for 2005 1/share
What is the price-earnings ratio? Yield on common stock?

Price-earnings ratio Yield on common
a. 12 to 1 33 1/3
b. 3 to 1 66 2/3
c. 3 to 1 11.11%
d. 4.5 to 1 50%
62. Ezekiel Company paid out one half of its 2005 earnings in dividends. The company’s
earnings increased by 20% and its dividends increased by 15% in 2006.
What was the dividend payout ratio for 2006?
a. 95.8% b. 75% c. 52.3% d. 47.9%
End
17

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Financial Ratio Analysis

Questions 1-4 are based on the following information:

1. How much is the net working capital for 2006?

Accounts payable 80,000

2. What is the current ratio for 2006?

3. How much is the net monetary assets for 2005?

Net monetary asset = quick assets – current liabilities

Accounts payable 90,000

4. What is the quick ratio for 2005?

Quick ratio = Quick Assets / Current liabilities

What is the working capital ratio? Acid-test ratio?

Net monetary asset = quick assets – current liabilities

Current Assets = P92,250 + P47,250

Working capital ratio = Current Assets / Current Liabilities

Acid test ratio = Quick Assets / Current liabilities

What is the current ratio? Quick ratio?

Current Ratio = Current Assets / Current Liabilities

Quick assets = Total current assets – inventories and prepaid expenses

Quick ratio = Quick Assets / Current liabilities

How much is the net working capital?

Solve for current liabilities:

Solve for current assets:

Current Ratio = Current Assets / Current Liabilities

Net Working Capital =Current Assets – Current Liabilities

How much is the net monetary assets?

Solve for current liabilities:

Solve for quick assets:

Net monetary asset = quick assets – current liabilities

How much are the current assets and quick assets?

Solve for quick assets:

Current assets was already given.

a. P 100,000 b. P120,000 c. P125,000 d. P150,000

Solve for current assets:

Solve for the amount to be borrowed:

There are 360 working days during the year.

Turnover Age of Receivables

Receivable turnover = Credit sales / Average receivable

Age of receivables = 360 / Receivable turnover

Solve for receivable turnover:

Solve for accounts receivable:

Solve for credit sales:

What was the decrease in sales between the two years?

Increase in account receivable:

What was the accounts receivable balance on December 31?

Solve for ending receivable balance:

3,200,000 + 8x = P3,600,000 (2)

There are 360 working days during the year.

What would be the increase in accounts receivable?

Solve the receivable for two years:

Receivable turnover = Credit sales / Average receivable

Receivable turnover = Credit sales / Average receivable

Increase in account receivable:

Credit sales P1,200,000

Within the discount period

Credit period (after the discount period)

Within the discount period:

Receivable turnover = (Credit sales x 30% )/ Average receivable

Within Credit period (after discount period)

Ending account receivable:

Within the discount period P48,000

(1.2 M x 70%) / (360 / 30)* = P70,000

What is the average collection period?