1.

When a balance sheet amount is related to an income statement amount in computing a ratio,
A. Comparisons with industry ratios are not meaningful.
B. The balance sheet amount should be converted to an average for the year.
C. The income statement amount should be converted to an average for the year.
D. The ratio loses its historical perspective because a beginning-of-the-year amount is combined with an end-
of-the-year amount.

3. A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable
the financial analyst to do?
A. Ascertain the relative potential of companies of similar size in different industries.
B. Evaluate financial statements of companies within a given industry of approximately the same value.
C. Determine which companies in the same industry are at approximately the same stage of development.

D. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or
between companies within a given industry without respect to relative size.

5. In a set of comparative financial statements, you observed a gradual decline in the net of gross ratio, i.e.,

between net sales and gross sales. This indicates that:

A. Sales volume is decreasing.

B. The discount period is being lengthened.
C. There is adherence to the collection policies of the company.
D. There is a stiffening in the grant of discounts to the customers.

7. Which one of the following ratios would provide a best measure of liquidity?
A. Sales minus returns to total debt.
B. Total assets minus goodwill to total equity.
C. Net profit minus dividends to interest expense.

D. Current assets minus inventories to current liabilities.

9. The ratio that measures a firm's ability to generate earnings from its resources is
A. Asset turnover. C. Days' sales in receivables.
B. Days' sales in inventory. D. Sales to working capital.

11. The ratio of analytical measurements which measures the productivity of assets regardless of capital structure is
A. Current ratio. C. Quick (acid test) ratio.

B. Debt ratio. D. Return on total assets.

13. An investor has been given several financial ratios for an enterprise but none of the financial reports. Which
combination of ratios can be used to derive return on equity?
A. Price-to-earnings ratio and return-on-assets ratio.
B. Net profit margin, total assets turnover, and equity multiplier.

C. Market-to-book-value ratio and total-debt-to-total-assets ratio.

D. Price-to-earnings ratio, earnings per share, and net profit margin.
15. In comparing the current ratios of two companies, why is it invalid to assume that the company with the higher
current ratio is the better company?
A. The current ratio includes assets other than cash.

B. A high current ratio may indicate inadequate inventory on hand.

C. The two companies may define working capital in different terms.

D. A high current ratio may indicate inefficient use of various assets and liabilities.

17. If the ratio of total liabilities to equity increases, a ratio that must also increase is
A. Return on equity.
B. The current ratio.

C. Times interest earned.

D. Total liabilities to total assets.

19. In a comparison of 2019 to 2018, Neir Co.’s inventory turnover ratio increased substantially although sales and
inventory amounts were essentially unchanged. Which of the following statements explains the increased
inventory turnover ratio?
A. Cost of goods sold decreased.
B. Total asset turnover increased.
C. Gross profit percentage decreased.
D. Accounts receivable turnover increased.

21. When compared to a debt-to-assets ratio, a debt-to-equity ratio would

A. Be lower than the debt-to-assets ratio.
B. Be higher than the debt-to-assets ratio.
C. Be about the same as the debt-to-assets ratio.
D. Have no relationship at all to the debt-to-assets ratio.

23. The following situations are descriptive of SBD Corporation. Which would be considered as the most favorable
for the common stockholders.
A. Equity ratio is low; return on assets exceeds the cost of borrowing.

B. Equity ratio is high; return on assets exceeds the cost of borrowing.

C. SBD stops paying dividends on its cumulative preferred stock; the price-earnings ratio of common stock is
low.
D. Book value per share of common stock is substantially higher than market value per share; return on
common stockholders’ equity is less than the rate of interest paid to creditors.

25. If a transaction causes total liabilities to decrease but does not affect the owners’ equity, what change if any, will
occur in total assets?
A. Assets will be decreased. C. No change in total assets.

B. Assets will be increased. D. None of the above.

27. On December 31, 2019, Northpark Co. collected a receivable due from a major customer. Which of the following
ratios would be increased by this transaction?
 A. Current ratio. C. Quick ratio.
B. Inventory turnover ratio. D. Receivable turnover ratio.

29. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000. Which of the following
transactions would improve Mabuhay’s current ratio?
A. Paying P40,000 of short-term accounts payable.
B. Collecting P20,000 of short-term accounts receivable.
C. Refinancing a P60,000 long-term mortgage with a short-term note.

D. Purchasing P100,000 of merchandise inventory with a short-term accounts payable.

31. Recording cash dividend payment when declaration was recorded earlier would
A. Increase both current ratio and working capital
B. Decreases both current ratio and working capital
C. Have no effect on current ratio or earnings per share
D. Increase current ratio but no effect on working capital.

33. If, just prior to the period of rising prices, a company changed its inventory measurement from FIFO to LIFO, the effect in the next
period would be to
A. B. C. D.
Current ratio Increase Increase Decrease Decrease
Inventory turnover Increase Decrease Increase Decrease

35. What would be the effect on book value per share and earnings per share if the corporation purchased its own
shares in the open market at a price greater than book value per share?
A. B. C. D.
Book value per share Increase No effect Decrease Decrease
Earnings per share Increase Increase Increase Decrease

37. A company issued long-term bonds and used the proceeds to repurchase 40% of the outstanding shares of its
stock. This financial transaction will likely cause the
A. Current ratio to decrease. C. Times-interest-earned ratio to decrease.
B. Fixed charge coverage ratio to increase. D. Total assets turnover ratio to increase.

1. A service company's working capital at the beginning of January of the current year was P70,000. The following
transactions occurred during January:
Performed services on account P30,000
Purchased supplies on account 5,000
Consumed supplies 4,000
Purchased office equipment for cash 2,000
Paid short-term bank loan 6,500
Paid salaries 10,000
Accrued salaries 3,500
What is the amount of working capital at the end of January?
A. P47,500 C. P80,500
B. P50,500 D. P90,000

3. In 2018, MPX Corporation’s net income was P800,000 and in 2019 it was P200,000. What percentage increase
in net income must MPX achieve in 2020 to offset the 2019 decline in net income?
 A. 60% C. 400%
B. 300% D. 600%

5. During 2019, Rand Co. purchased P960,000 of inventory. The cost of goods sold for 2019 was P900,000, and
the ending inventory at December 31, 2019 was P180,000. What was the inventory turnover for 2019?
A. 5.0 C. 6.0
B. 5.3 D. 6.4

7. What would be a company’s “times interest earned ratio” if interest paid on loans amount to P9,000 and its net
income after income tax is P99,000. (Assume a 25% income tax rate on first P100,000 of income and 35%
income tax rate on income in excess of P100,000.)
A. 10 times C. 13 times
B. 12 times D. 16.21 times

9. The average stockholders equity for ABC Company for 2019 was P2,000,000. Included in this figure is
P200,000 par value of 8% preferred stock, which remained unchanged during the year. The return on common
shareholders’ equity was 12.5% during the 2019. How much was the net income of the company in 2019?
A. P234,000 C. P250,000

B. P241,000 D. P225,000

11. The working capital of Regalado Co. is P600,000 and its current ratio is 3 to 1. The amount of current assets is
A. P600,000 C. P1,200,000
B. P900,000 D. P1,800,000

13. The following were reflected from the records of War Freak Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40%
Shares outstanding throughout 2019
Preferred 20,000
Common 35,000
Income tax ratio 40%
Price earnings ratio 5 times
The dividend yield ratio is:
A. 0.08 C. 0.40
B. 0.12 D. 0.50

15. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm experienced P2 million in sales
and sustains an inventory turnover of 8.0, what are the firm's current assets?
A. P500,000 C. P1,250,000
B. P1,000,000 D. P1,500,000

17. Perry Technologies Inc. had the following financial information for the past year:
Sales P860,000 Inventory turnover 8x
Quick ratio 1.5 Current ratio 1.75
What were Perry’s current liabilities?
A. P 61,429 C. P430,000
B. P107,500 D. P500,000
19. An enterprise has total asset turnover of 3.5 times and a total debt to total assets ratio of 70%. If the enterprise
has total debt of P1,000,000, it has a sales level of
A. P200,000.00 C. P2,450,000.00
B. P408,163.26 D. P5,000,000.00

21. JC Goods, Inc. has a total assets turnover of 0.30 and a profit margin of 10%. The president is unhappy with the
current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the
profit margin to 15% and (2) by increasing total assets turnover. What new asset turnover ratio, along with the
15% profit margin, is required to double the return on assets?
A. 35% C. 45%
B. 40% D. 50%

23. Watson Corporation computed the following items from its financial records for the year just ended:
Price-earnings ratio 12
Payout ratio .6
Asset turnover .9
The dividend yield on Watson's common stock is
A. 5.0% C. 7.5%
B. 7.2% D. 10.8%

25. Shepherd Enterprises has an ROE of 15 percent, a debt ratio of 40 percent, and a profit margin of 5 percent.
The company’s total assets equal P800 million. What are the company’s sales? (Assume that the company has
no preferred stock.)
A. P 360,000,000 C. P1,440,000,000
B. P 960,000,000 D. P2,400,000,000

27. A firm has total assets of P1,000,000 and a debt ratio of 30 percent. Currently, it has sales of P2,500,000, total
fixed costs of P1,000,000, and EBIT of P50,000. If the firm’s before-tax cost of debt is 10 percent and the firm’s
tax rate is 40 percent, what is the firm’s ROE?
A. 1.7% C. 6.0%
B. 2.5% D. 8.3%

29. Given the following information, calculate the market price per share of WAM Inc.
Net income = P200,000 Earnings per share = P2.00
Stockholders’ equity = P2,000,000 Market/Book ratio = 0.20
A. P 2.00 C. P 8.00
B. P 4.00 D. P20.00

31. Selected data from the year-end financial statements of World Cup Corp. are presented below. The difference
between average and ending inventories is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P600,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
World’s net sales for the year were
A. P1.2 million C. P4.0 million
B. P2.4 million D. P6.0 million
33. Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to
60 days, receivables of P150,000, total assets of P3 million, and a debt ratio of 0.64. What is the firm’s return on
equity (ROE)? Assume a 360-day year.
A. 3.3% C. 8.1%
B. 7.1% D. 33.3%

35. Last year, Thomas Lumber Co. had a profit margin of 10 percent, total assets turnover of 0.5, and a debt ratio of 20 percent. (The company finances its assets with debt and common equity; it
does not use preferred stock.) This year, the company’s CFO wants to double ROE. She expects the total assets turnover will remain at 0.5, while the profit margin and debt ratio will increase
enough to double ROE. Assume that the profit margin is increased to 15 percent, what debt ratio will the company need in order to double its ROE?

A. 0.30 C. 0.40
B. 0.33 D. 0.45

37. Lone Star Plastics has the following data:

Assets: P100,000 Interest rate: 8.0%
Debt ratio: 40.0% Total assets turnover: 3.0
Profit margin: 6.0% Tax rate: 40%
What is Lone Star’s EBIT?
A. P12,000 C. P30,000
B. P18,000 D. P33,200

39. The Meryl Corporation’s common stock is currently selling at $100 per share, which represents a P/E ratio of 10.
If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60
percent, what is its return on total assets (ROA)?
A. 8.0% C. 12.0%
B. 10.0% D. 16.7%

49. Rainier Inc. has P2 million in current assets

, its current ratio is 1.6, and its quick ratio is 1.2. The company plans to raise funds as additional notes payable and to use these funds to increase
inventory. By how much can Rainier’s short-term debt (notes payable) increase without pushing its quick ratio below 0.8?

A. P278,000 C. P556,000
B. P333,000 D. P625,000

51. Victoria Enterprises has P1.6 million of accounts receivable on its balance sheet. The company’s DSO is 40
(based on a 360-day year), its current assets are P2.5 million, and
its current ratio is 1.5 The company plans to reduce its DSO from 40 to the industry average of 30 without causing a decline in sales. The resulting decrease in accounts receivable will free up
.
cash that will be used to reduce current liabilities. If the company succeeds in its plan, what will Victoria’s new current ratio be?

A. 0.72 C. 1.66
B. 1.50 D. 1.97

53. Miller and Rogers Partnership has P3 million in total assets, P1.65 million in equity, and a P500,000 capital
budget. To maintain the same debt-equity ratio, how much debt should be incurred?
A. P50,000 C. P275,000
B. P225,000 D. P450,000

55. The following information pertains to AL Corporation as of and for the year-ended December 31, 2019.
Liabilities P 60,000
Stockholders’ equity P 500,000
Shares of common stock issued and outstanding 10,000
Net income P 30,000
During 2019, AL officers exercised stock options for 1,000 shares of stock at an option price of P8 per share.
What was the effect of exercising the stock option?
A. No ratios were affected. C. Debt to equity ratio decreased to 12%.
B. Asset turnover increased to 50.4% D. Earnings per share increased by P0.33
57. Planners have determined that sales will increase by 25% next year, and that the profit margin will remain at
15% of sales. Which of the following statements is correct?
A. Profit will grow by 25%.
B. The profit margin will grow by 15%.
C. Profit will grow proportionately faster than sales.
D. Ten percent of the increase in sales will become net income.

59. Dean Brothers Inc. recently reported net income of P1,500,000. The company has 300,000 shares of common
stock, and it currently trades at P60 a share. The company continues to expand and anticipates that one year
from now its net income will be P2,500,000. Over the next year the company also anticipates issuing an
additional 100,000 shares of stock, so that one year from now the company will have 400,000 shares of common
stock. Assuming the company’s price/earnings ratio remains at its current level, what will be the company’s
stock price one year from now?
A. P55 C. P70
B. P60 D. P75

61. Hanson Corporation's present year ROE remained at last year's 14% level, while the profit margin was reduced
from 8% to 4% and the leverage ratio increased from 1.2 to 1.5. The effects on asset turnover were to
A. Remain constant. C. Increase from 1.46 to 2.33.
B. Decease from 14.58 to 2.33. D. Increase from 4.76 to 9.60.

63. Southeast Packaging’s ROE last year was only 5 percent, but its management has developed a new operating
plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in
interest charges of P8,000 per year. Management projects an EBIT of P26,000 on sales of P240,000, and it
expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40
percent. If the changes are made, what return on equity will Southeast earn?
A. 9.00% C. 17.50%
B. 11.25% D. 22.50%