UNIVERSIDAD DE MANILA

COLLEGE OF BUSINESS ADMINISTRATION

FINANCIAL MANAGEMENT
Name: ___________________________________
Student Number: __________________________

TRUE OR FALSE.
1. Equity ratio is the creditors’ risk in the business while the debt ratio is the shareholders’ risk or
exposure in the business.
2. Quick assets ratio is a more severe test of immediate liquidity to meet currently maturing obligations.
Quick assets include cash, marketable securities, and receivables. This ratio is also referred to as
acid-test ratio.
3. When applied to the balance sheet, the vertical analysis base is the total assets (i.e., 100%). In the
income statement, the base is the net sales.
4. There are at least three traditional techniques of interpreting financial statements, namely Horizontal
Analysis, Trend Analysis, and Financial Mix Ratio.
5. Under horizontal or comparative analysis, the percentage of change is not computed if the
denominator or the base is ZERO or NEGATIVE.
6. Financial risk refers to the uncertainty of not meeting future obligations as they mature due to the
inadequacy of assets or due to the critical level of assets that would be used in meeting future
debts.
7. Return on Investment measures the ability of the management to generate return on every peso of
resources employed in operating the business.
8. Solvency refers to the ability of the business to pay its obligations in cash as they mature.
9. Inventory turnover indicates the effectiveness of the business in selling its inventories. It determines
the number of times the entire inventory base is sold in a given period.
10. Debt-to-equity ratio measures the relative share of creditors over the total resources of the firm.

MULTIPLE CHOICE.
1. Last year, a business has no long-term investment. This year, long-term investments amount to
₱100,000. In a horizontal analysis, the change in a long-term investment should be expressed as
a. An absolute value of ₱100,000 and an increase of 100%.
b. An absolute value of ₱100,000 and an increase of 1,000%.
c. An absolute value of ₱100,000 and no value for a percentage change.
d. No change in any terms because there was no investment in the previous year.

2. Horizontal, vertical, and common-size analysis are techniques that are used by analysts in
understanding the financial statement of companies. Which of the following is an example of
vertical, common-size analysis?
a. Commission expense in 2021 is 10% greater than it was in 2020.
b. A comparison in financial ratio from between two or more firms in the same industry.
c. A comparison in financial form between two or more firms in different industries.
d. Commission expense in 2021 is 5% of the sales.

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

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 a. collectability. c. liquidity.
b. operational leverage. d. financial leverage.

4. This indicates the length of time spent before the average inventory is sold to customers
a. Inventory turnover
b. Operating turnover
c. Inventory days
d. Payable turnover

5. Jaguar Corporation’s books disclosed the following information as of and for the year ended
December 31, 2021:
Net credit sales ₱2,000,000
Net cash sales 500,000
Merchandise purchases 1,000,000
Inventory at beginning 600,000
Inventory at end 200,000
Accounts receivable at beginning 300,000
Accounts receivable at ending 700,000
Net income 100,000

Jaguar’s percent of net income on sales is

a. 4%. c. 44%.
b. 9%. d. 56%.

6. Which of the following is an appropriate computation for return on investment?

a. Income divided by total assets.
b. Income divided by sales.
c. Sales divided by total assets.
d. Sales divided by stockholders’ equity.

7. If the return on total assets is 10% and if the return on common stockholders’ equity is 12%, then
a. The after-tax cost of long-term debt is probably greater than 10%.
b. The after-tax cost of long-term debt is 12%.
c. Leverage is negative.
d. The after-tax cost of long-term debt is probably less than 10%.

8. At December 31, 2020, Morgan Inc., had 100,000 shares of ₱10 par value ordinary share issued and
outstanding. There was no change in the number of shares outstanding during 2021. Total
shareholders’ equity at December 31, 2021, ₱2,800,000. The net income for the year ended
December 31, 2021 was ₱800,000. During 2021, Morgan paid ₱3 per share in dividends on its
ordinary share. The quoted market value of Morgan’s ordinary share was ₱48 per share on
December 31, 2021. What was the price-earnings ratio on ordinary share for 2021?
a. 9.6 to 1 c. 6.0 to 1
b. 8.0 to 1 d. 3.5 to 1

9. Mr. Snappy, the owner of Galactic Co., is arguing with his accountant as to the best measure of
liquidity. He was considering the following and you are to advise him which one is the best. Which
one will you choose?
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 a. Current assets minus inventories to current liabilities.
b. Total assets minus goodwill to total liabilities.
c. Net income minus dividends to interest expense.
d. Sales minus returns to total debt.

10. Super Corp. has an acid test ratio 1.5 to 1.0, which of the following will cause this ratio to
deteriorate?
a. Payment of cash dividends previously declared.
b. Borrowing short term loan from a bank.
c. Sale of inventory on account.
d. Sale of equipment at a loss.

11. OTW Corporation has current assets totaling ₱15 million and a current ratio of 2.5 to 1. What is
OTW’s current ratio immediately after it has paid ₱2 million of its accounts payable?
a. 3.75 to 1 c. 3.25 to 1
b. 2.75 to 1 d. 4.75 to 1

12. Short-term creditors would probably most interested in which ratio?

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

13. The following computations were made from Bird Company’s 2021 books:
Number of days sales in inventory 61
Number of days sales in trade accounts receivable 33

What was the number of days in Bird’s 2021 operating cycle?

a. 33 c. 61
b. 94 d. 47

14. If the average age of the inventory is 90 days, the average age of accounts payable is 60 days,
and the average age of accounts receivable is 65 days, the number of days in the cash flow cycle
is
a. 65.00 days. c. 72.56 days.
b. 51.18 days. d. 71.51 days.

15. Which of the following Financial Statement analysis extends beyond two years? The purpose of
this analysis is to track down what happened in the past and provide a pattern on what may
happen in the coming years.
a. Trend Analysis c. Horizontal Analysis
b. Vertical Analysis d. Financial mix ratio

Questions 16 to 18 are based on the following information:

The following selected financial data were taken from the accounting records of Naomi Corporation:

2021 2020
Cash ₱ 170,000 ₱ 90,000
Accounts receivable (net) 450,000 400,000
Merchandise Inventory 540,000 420,000
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 Short-term marketable securities 80,000 40,000
Land and building (net) 1,000,000 1,000,000
Mortgage payable-current portion 60,000 50,000
Accounts payable and accrued liabilities 240,000 220,000
Short-term notes payable 100,000 140,000

Net credit sales totaled to ₱3,000,000 and ₱2,000,000 for the years ended December 31, 2021 and
2020, respectively.

16. At December 31, 2021, Naomi’s quick (acid) test ratio was
a. 1.50 to 1.00. c. 2.06 to 1.00.
b. 1.75 to 1.00. d. 3.10 to 1.00.

17. For 2021, Naomi’s account receivable turnover was

a. 1.17 c. 6.67
b. 1.5 d. 7.06

18. What is the amount of Naomi’s working capital at December 31, 2021?
a. ₱41,000 c. ₱50,000
b. ₱840,000 d. ₱91,000

19. A company’s current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning of the year. At
the end of the year, the company has a current ratio of 2.5 to 1 and a quick ratio of 0.8 to 1. Which
of the following could help explain the divergence in the ratios from the beginning to the end of the
year?
a. An increase in inventory levels during the year.
b. An increase in credit sales in relationship to sales.
c. An increase in the net of payables during the current year.
d. An increase in the collection rate of accounts receivable.

20. Selected data from the year-end financial statements of Yumi Corp. are presented below. The
difference between average and ending inventories is immaterial:
Current ratio 2.0
Quick ratio 1.5
Current liabilities ₱600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%

Yumi’s net sales for the year were:

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

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