Financial Statement Analysis

MODULE 10 FINANCIAL small. Which type of numbers would be most meaningful for statement analysis?
STATEMENTANALYSIS A. Absolute numbers would be most meaningful for both the large and smallfirm.
B. Absolute numbers would be most meaningful in the large firm; relative numbers would be most meaningful
THEORIES: in the smallfirm.
C. Relativenumberswouldbemostmeaningfulforthelargefirm;absolutenumberswould
1. Management is a user of financial analysis. Which of the following comments does notrepresent a fair statement be most meaningful for the small firm.
as to the managementperspective?
b. D. Relative numbers would be most meaningful for both the large and small firm, especially for
a. Management is always interested in maximumprofitability. interfirmcomparisons.
b. Management is interested in the view ofinvestors.
7. Which of these statements is false?
c. Management is interested in the financial structure of theentity.
a. Many companies will not clearly fit into any oneindustry.
d. Management is interested in the asset structure of theentity.
b. A financial service uses its best judgment as to which industry the firm bestfits.
Limitations c. The analysis of an entity's financial statements can be more meaningful if the results are compared
with industry averages and with results ofcompetitors.
2. A limitation in calculating ratios in financial statement analysis isthat d. A company comparison should not be made with industry averages if the company does not clearly
a. it requires acalculator. fit into any oneindustry.

b. no one other than the management would be interested inthem.

Common-sized financial statements
c. some account balances may reflect atypical data at yearend.
8. Which of the following generally is the most useful in analyzing companies of differentsizes?
d. they seldom identify problem areas in acompany.
a. comparativestatements C. price-levelaccounting
b. common-sizedfinancialstatements D. profitabilityindex
3. Whichofthefollowingisnotalimitationoffinancialstatementanalysis?
a. The cost basis. C. The diversification offirms.
9. Statements in which all items are expressed only in relative terms (percentages of a base) are termed:
b. The use of estimates. D. The availability ofinformation.
a. Verticalstatements C. FundsStatements
4. Which of the following does not represent a problem with financialanalysis? b. HorizontalStatements D. Common-SizeStatements
a. Financial statement analysis is an art; it requires judgment decisions on the part of the analyst.
b. Financial analysis can be used to detect apparent liquidityproblems. 10. The percent of property, plant and equipment to total assets is an exampleof:
c. There are as many ratios for financial analysis as there are pairs offigures. a. verticalanalysis C. profitabilityanalysis
d. Some industry ratio formulas vary from source tosource. b. solvencyanalysis D. horizontalanalysis

5. The use of alternative accountingmethods: 11. Vertical analysis is a technique that expresses each item in a financialstatement
a. is not a problem in ratio analysis because the footnotes disclose the methodused. a. in pesos andcentavos.
b. may be a problem in ratio analysis even ifdisclosed. b. as a percent of the item in the previousyear.
c. is not a problem in ratio analysis since eventually all methods will lead to the sameend. c. as a percent of a baseamount.
d. is only a problem in ratio analysis with respect toinventory. d. starting with the highest value down to the lowestvalue.

Industry Analysis
6. Suppose you are comparing two firms in the steel industry.One firm is large and the other is
12. In performing a vertical analysis, the base for prepaid expensesis
a.

567
 Financial Statement Analysis

21. Ratios are used as tools in financialanalysis

a. totalcurrentassets. C. totalliabilities.
a. instead of horizontal and verticalanalyses.
b. totalassets. D. prepaid expenses in a previousyear.
b. because they can provide information that may not be apparent from inspection of the individual
components of a particularratio.
Horizontal analysis
13. The percentage analysis of increases and decreases in individual items in comparative financial statements c. because even single ratios by themselves are quitemeaningful.
iscalled: d. because they are prescribed byGAAP.
a. verticalanalysis C. profitabilityanalysis
22. In the near term, the important ratios that provide the information critical to the short-run operation of the
b. solvencyanalysis D. horizontalanalysis firmare:
a. liquidity, activity,andprofitability C. liquidity, activity, andequity
14. Horizontal analysis is also knownas b. liquidity, activity,anddebt D. activity, debt, andprofitability
a. linearanalysis. C. trendanalysis.
23. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is
b. verticalanalysis. D. common sizeanalysis.
referred toas:
a. solvencyandleverage C. solvency andliquidity
15. In which of the following cases may a percentage change becomputed?
b. solvencyandprofitability D. solvency andequity
a. The trend of the amounts is decreasing but all amounts arepositive.
b. There is no amount in the baseyear. Liquidity ratios
c. There is a negative amount in the base year and a negative amount in the subsequent year.
d. There is a negative amount in the base year and a positive amount in the subsequent year. Interestedparties
24. The primary concern of short-term creditors when assessing the strength of a firm is the entity’s
16. Horizontal analysis is a technique for evaluating a series of financial statement data over a period oftime a. short-termliquidity C. market price ofstock
a. that has been arranged from the highest number to the lowestnumber. b. profitability D.leverage
b. that has been arranged from the lowest number to the highestnumber.
c. to determine which items are inerror. 25. Short-term creditors are usually most interested inassessing
d. to determine the amount and/or percentage increase or decrease that has takenplace. a. solvency. C.marketability.
b. liquidity. D.profitability.
Trend analysis
17. Trend analysis allows a firm to compare its performanceto:
a. other firms intheindustry C. otherindustries
b. other time periods withinthefirm D. none of theabove

Risk and return

18. The present and prospective stockholders are primarily concerned with afirm’
a. profitability C.leverage
b. liquidity D. risk andreturn

19. Whichsuppliersoffundsbearthegreatestriskandshouldthereforeearnthegreatestreturn?
a. commonstockholders C. preferredshareholders
b. general creditors suchasbanks D.bondholders

Measures of Risk
20. The following groups of ratios primarily measurerisk:
a. liquidity, activity, andcommonequity C. liquidity, activity, anddebt
b. liquidity, activity,andprofitability D. activity, debt, andprofitability

Financial ratios

568
 Financial Statement Analysis

b. current ratio D. days’ sales in receivables

26. The two categories of ratios that should be utilized to asses a firm’s true liquidity arethe
a. current andquickratios C. liquidity and profitabilityratios 35. The current ratiois
b. liquidity anddebtratios D. liquidity and activityratios a. calculated by dividing current liabilities by currentassets.
b. used to evaluate a company’s liquidity and short-term debt payingability.
27. Whichofthefollowingisthemostofinteresttoafirm’ssuppliers?
c. used to evaluate a company’s solvency and long-term debt payingability.
A. profitability C. assetutilization
d. calculated by subtracting current liabilities from currentassets.
B. debt D.liquidity
36. Which of the following ratios is rated to be a primary measure of liquidity and considered of highest
Measures of liquidity significance rating of the liquidity ratios a bankanalyst?
a. Debt/Equity
28. The ratios that are used to determine a company’s short-term debt paying abilityare
b. Currentratio
a. asset turnover, times interest earned, current ratio, and receivablesturnover.
c. Degree of FinancialLeverage
b. times interest earned, inventory turnover, current ratio, and receivablesturnover.
d. Accounts Receivable Turnover in Days
c. times interest earned, acid-test ratio, current ratio, and inventoryturnover.
d. current ratio, acid-test ratio, receivables turnover, and inventoryturnover. 37. A weakness of the current ratiois
a. the difficulty of thecalculation.
29. Which of the following is a measure of the liquidity position of acorporation?
b. that it does not take into account the composition of the currentassets.
a. earnings pershare
c. that it is rarely used by sophisticatedanalysts.
b. inventoryturnover d. that it can beexpressed as a percentage, as a rate, or as a proportion.
c. currentratio
d. number of times interest chargesearned Acid-test or quick ratio
38. A measure of a company’s immediate short-term liquidity isthe
30. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell a. currentratio.
on credit to acompany?
b. current cash debt coverageratio.
a. Currentratio C. Assetturnover
c. cash debt coverageratio.
b. Acid-testratio D. Receivablesturnover
d. acid-testratio.
31. Which of the following ratios would be least helpful in appraising the liquidity of current assets?
a. AccountsReceivableturnover C. CurrentRatio 39. The acid-test or quickratio
b. Days’ salesininventory D. Days’ sales in accountsreceivable a. is used to quickly determine a company’s solvency and long-term debt payingability.
b. relates cash, short-term investments, and net receivables to currentliabilities.
32. Which ratio is most helpful in appraising the liquidity of currentassets?
a. currentratio C. acid-testratio
b. debtratio D. accounts receivableturnover

Not a measure of liquidity

33. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell
on credit to acompany?

A. accountsbreceivable turnover. C. acid testratio.

B.assetturnover. D. currentratio.

Current ratio
34. Typically, which of the following would be considered to be the most indicative of a firm's short- term debt
paying ability?
a. workingcapital C. acid test ratio
569
 Financial Statement Analysis

c. is calculated by taking one item from the income statement and one item from the balance sheet. Total asset turnover measures the ability of a firmto:
d. is the same as the current ratio except it is rounded to the nearest wholepercent. a. generate profits onsales
b. generate sales through the use ofassets
Not a liquidity ratio c. cover long-termdebt
40. Which one of the following would not be considered a liquidityratio? d. buy newassets
a. Currentratio. C. Quickratio.
47. A measure of how efficiently a company uses its assets to generate sales isthe
b. Inventoryturnover. D. Return onassets.
a. assetturnoverratio. C. profit marginratio.
Activity ratios b. cash return onsalesratio. D. return on assetsratio.
Days receivable & receivable turnover
41. Quality of receivables Solvency ratios
42. Which of the following does notbear on the quality ofreceivables? Interested parties
a. shortening the creditterms 48. Long-term creditors are usually most interested inevaluating
b. lengthening the credit terms a. liquidity. C.profitability.
c. lengthening the outstandingperiod b. marketability. D.solvency.
d. all of the above bear on the quality ofreceivables
Financial Leverage
Days receivable 49. Trading on the equity (leverage) refers tothe
43. A general rule to use in assessing the average collection periodis a. amount of workingcapital.
a. that is should not exceed 30days. b. amount of capital provided byowners.
b. it can be any length as long as the customer continues to buymerchandise. c. use of borrowed money to increase the return toowners.
d. earnings pershare.
c. that it should not greatly exceed the discountperiod.
d. that it should not greatly exceed the credit termperiod. 50. The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total
assets is sometimes referred toas:
Asset utilization ratios a. leverage C.yield
Performance measures b. solvency D. quickassets
44. All of the following are asset utilization ratiosexcept:
51. Using financial leverage is a good financial strategy from the viewpoint of stockholders of companieshaving:
a. averagecollectionperiod C. receivablesturnover
a. a highdebtratio C. a steadily declining currentratio
b. inventoryturnover D. return onassets b. steady orrisingprofits D. cyclical highs andlows

Asset turnover 52. Theratiothatindicatesacompany’sdegreeoffinancialleverageisthe

45. Asset turnovermeasures a. cash debtcoverageratio. C. free cash flowratio.
a. how often a company replaces itsassets. b. debt tototalassets. D. times-interest earnedratio.
b. how efficiently a company uses its assets to generatesales.
53. Interest expense creates magnification of earnings through financial leveragebecause:
c. the portion of the assets that have been financed bycreditors.
d. the overall rate of return onassets.

46.

570
 Financial Statement Analysis

Debt-to-equity ratio
a. while earnings available to pay interest rise, earnings to residual owners risefaster
59. Which of the following statements best compares long-term borrowing capacityratios?
b. interest accompanies debtfinancing
a. The debt/equity ratio is more conservative than the debtratio.
c. interest costs are cheaper than the required rate of return to equityowners
b. The debt to tangible net worth ratio is more conservative than the debt/equityratio.
d. S. the use of interest causes higher earnings
c. The debt/equity ratio is more conservative than the debt to tangible net worthratio.
Measures of solvency d. The debt ratio is more conservative than the debt/equityratio.
54. The set of ratios that is most useful in evaluating solvencyis
Times interest earned
a. debt ratio, current ratio, and times interestearned
60. A times interest earned ratio of 0.90 to 1 meansthat
b. debt ratio, times interest earned, and return onassets
a. the firm will default on its interestpayment
c. debt ratio, times interest earned, and quickratio
d. debt ratio, times interest earned, and cash flow todebt b. net income is less than the interestexpense
c. the cash flow is less than the netincome
55. Which of the following ratios is most relevant to evaluatingsolvency? d. the cash flow exceeds the netincome
a. Returnonassets C. Days’ purchases in accountspayable
b. Debtratio D. Dividendyield Fixed charge coverage
61. A fixed chargecoverage:
Fixed assets to long-term liabilities a. is a balance sheet indication of debt carryingability
56. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or b. is an income statement indication of debt carryingability
bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a
long-termbasis? c. frequently includes research anddevelopment
a. ratio of fixed assets to long-termliabilities d. computation is standard from firm tofirm
b. ratio of net sales toassets
Off-balance sheet liabilities
c. number of days' sales inreceivables
62. If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial
d. rate earned on stockholders'equity statements, thenthe
a. times interest earned ratio will be overstated, based upon the financialstatements
Debt ratio
b. debt ratio will beunderstated
57. The debt ratioindicates:
c. working capital will beunderstated
a. a comparison of liabilities with totalassets
d. fixed charge ratio will be overstated, based upon the financialstatements
b. the ability of the firm to pay its currentobligations
c. the efficiency of the use of totalassets Profitability ratios
d. the magnification of earnings caused byleverage Interested parties
63. The return on assets ratio is affected bythe
58. The debt to total assets ratiomeasures
a. asset turnoverratio.
a. the company’sprofitability.
b. debt to total assetsratio.
b. whether interest can be paid on debt in the currentyear.
c. profit marginratio.
c. the proportion of interest paid relative to dividendspaid.
d. asset turnover and profit marginratios.
d. the percentage of the total assets provided bycreditor.
64. Stockholders are most interested inevaluating

571
 Financial Statement Analysis

Dividend yield
a. liquidity. C.profitability.
71. Which of the following ratios represents dividends per common share in relation to market price per
b. solvency. D.marketability. commonshare?
a. dividendpayout C.price/earnings
Performance measures b. dividendyield D. book value pershare
65. The set of ratios that are most useful in evaluating profitabilityis
a. ROA, ROE, and debt toequityratio C. ROA, ROE, and acid-testratio Financial Statement Analysis
b. ROA, ROE, anddividendyield D. ROA, ROE, and cash flow todebt Accounts Receivable
72. Which of the following reasons should notbe considered in order to explain why the receivables appear to be
abnormallyhigh?
Earnings per share
a. Sales volume decreases materially late in theyear.
66. Which of the following ratios appears most frequently in annualreports?
b. Receivables have collectibility problems and possibly some should have been writtenoff.
a. EarningsperShare C. ProfitMargin
c. Material amount of receivables are on the installmentbasis.
b. ReturnonEquity D.Debt/Equity
d. Sales volume expanded materially late in theyear.
Return on assets
73. An acceleration in the collection of receivables will tend to cause the accounts receivable turnoverto:
67. Return onassets a. decrease C. either increase ordecrease
a. can be determined by looking at a balancesheet b. remainthesame D.increase
b. should be smaller than return onsales
c. can be affected by the company’s choice of a depreciationmethod Inventories
74. Which of the following would best indicate that the firm is carrying excessinventory?
d. should be larger than return onequity
a. a decline in the currentratio
Return on investments b. stable current ratio with declining quickratios
68. Return on investmentmeasures: c. a decline in days' sales ininventory
a. return to all suppliersoffunds C. return to all long-term suppliers offunds d. a rise in total assetturnover
b. return to alllong-termcreditors D. return tostockholders
75. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio,
Market testratios and a low inventory turnover. What might you assume aboutTri-C?
Price-earningsratio a. Its cash balance istoolow. C. Its current liabilities are toolow.
69. The price/earningsratio b. Its cost of goods sold istoolow. D. Its average inventory is toohigh.
a. measures the past earning ability of thefirm
Current ratio
b. is a gauge of future earning power as seen byinvestors
76. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently2.0?
c. relates price todividends a. Buy raw materials oncredit
d. relates
b. Sell marketable securities atcost
70. Which of the following ratios usually reflects investors opinions of the future prospects for the firm? c. Pay off accounts payable withcash
a. dividendyield C. book value pershare
b. price/earningsratio D. earnings pershare

572
 Financial Statement Analysis

d. Pay off a portion of long-term debt withcash b. Collecting some of the current accountsreceivable.
c. Paying off some long-termdebt.
Fixed asset turnover ratio d. Purchasing additional inventory on credit (accountspayable).
77. Which of the following circumstances will cause sales to fixed assets to be abnormallyhigh?
83. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before borrowing P60,000
a. A labor-intensiveindustry. from the bank with a 3-month note payable. What effect did the borrowing transaction have on Tyner
b. The use of units-of-productiondepreciation. Company's currentratio?
e. The ratio remained unchanged.
c. A highly mechanizedfacility.
f. The change in the current ratio cannot be determined.
d. High direct labor costs from a new unioncontract.
g. The ratio decreased.
Total asset turnover h. The ratio increased.
78. A firm with a total asset turnover lower than the industry standard and a current ratio which meets industry
standard might haveexcessive: 84. Which of the following actions will increase a firm's current ratio if it is now less than1.0?
a. Accountsreceivable C.Debt a. Convert marketable securities tocash.
b. Fixedassets D.Inventory b. Pay accounts payable withcash.
c. Buy inventory with short term credit (i.e. accountspayable).
Profitability analysis
79. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of P2,500,000. Which of d. Sell inventory atcost.
the following best compares the profitability of Denver andOakland?
a. Oakland Enterprises is 25% more profitable than DenverDynamics. Acid-test ratio
b. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't 85. 38. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cashbyshort-
bequantified. termdebtandcollectionofaccountsreceivablehaveontheratio?
a.
c. Oakland Enterprises is only more profitable if it is smaller than DenverDynamics. b. A. B. C. D.

d. Further information is needed for a reasonablecomparison. c. Short-termborrowing Increase Increase Decrease Decrease
d. Collectionofreceivable Noeffect Increase Noeffect
Debt ratio Decrease
80. Companies A and B are in the same industry and have similar characteristics except that Company A is more
leveraged than Company B. Both companies have the same income before interest and taxes and the same
total assets. Based on this information we could concludethat
a. Company A has higher net income than CompanyB
b. Company A has a lower return on assets than companyB
c. Company A is more risky than CompanyB.
d. Company A has a lower debt ratio than companyB

Sensitivity Analysis
Current ratio
81. A firm has a current ratio of 1:1.In order to improve its liquidity ratios, this firm should
a. improve its collection practices, there byi ncreasing cash and increasing its current and quick ratios.
b. improve its collection practices and pay accounts payable, there decreasing current liabilities and
increasing the current and quickratios.
c. decrease current liabilities by utilizing more long-term debt, thereby increasing the current and
quick ratios.
d. increase inventory, there by increasing current assets and the current and quick ratios.

82. Recently the M&M Company has been having problems. As a result, its financial situation has deteriorated.
M&M approached the First National Bank for a badly needed loan, but the loan officer insisted that the
current ratio (now 0.5) be improved to at least 0.8 before the bank would even consider granting the credit.
Which of the following actions would do the most to improve the ratio in the shortrun?
a. Using some cash to pay off some currentliabilities.
573
 Financial Statement Analysis

a. sale of investmentsatyear-end C. purchase of a new building atyear-end

Profit margin
b. increased turnover ofoperatingassets D. a stocksplit
86. Which of the following would most likely cause a rise in net profit margin?
a. increasedsales C. decreased operating expenses
91. A firm with a lower net profit margin can improve its return on total assetsby
b. decreased preferred dividends D. increased cost ofsales
a. increasing itsdebtratio C. increasing its total assetturnover
b. decreasing its fixedassetsturnover D. decreasing its total assetturnover
Return on assets
87. .Return on assets cannotfall under which of the followingcircumstances? PROBLEMS:
Horizontal analysis
A B C D 92. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as the base data,
. . net income decreased by 70 percent in 2007 and increased by 175 percent in 2008. The respective net income
reported by Kline Corporation for 2007 and 2008are:
Net profit D R R D
a. A. P 600,000andP5,500,000 C. P1,400,000 andP3,500,000
margin e i i e
b. B. P5,500,000 andP 600,000 D. P1,400,000 andP5,500,000
c s s c
l e e l 93. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in 2007. The
i i increase in net income ofP300,000:
n n a. can be statedas 0% C. cannot be stated as apercentage
e e b. can be stated as100%increase D. can be stated as 200%increase
Total asset R D R D
Liquidity ratios
turnover i e i e
94. The following financial data have been taken from the records of Ratio Company: Accountsreceivable
s c s c P200,000
e l e l Accounts payable 80,000
i i Bonds payable, due in 10 years 500,000
n n Cash 100,000
e e Interest payable, due in three months 25,000
Inventory 440,000
Debt ratio
Land 800,000
88. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor, has long-term
debt of P200,000. Which of the following statements best represents an analysis of the long-term debt Notes payable, due in six months 250,000
position of these twofirms?
What will happen to the ratios below if Ratio Company uses cash to pay 50 percent of it's
a. Jones obviously has too much debt when compared to itscompetitor.
accounts payable?
b. Smith Company's times interest earned should be lower thanJones.
c. Smith has five times better long-term borrowing ability thanJones.
d. Not enough information to determine if any of the answers arecorrect.
A. B C D

Times interest earned .

89. Which of the following will notcause times interest earned to drop? Assume no other changes than thoselisted. Current Incr D I D
a. A rise in preferred stockdividends. ratio eas e n e
b. A drop in sales with no change in interestexpense. e c c c
c. An increase in interestrates. r r r

d. An increase in bonds payable with no change in operatingincome. e e e

a a a
DuPont Analysis s s s
90. Which of the following could cause return on assets to decline when net profit margin is increasing? e e e

574
 Financial Statement Analysis
Acid-test ratio Increae Decrease Decrease Increase

Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at the
end of the currentyear:

Accounts P145,0
payable 00
Accounts 110,0
receivable 00
Accrued liabilities 4,000
Cash 80,000

575
 Financial Statement Analysis

Inventory turnover
Marketablesecurities 250,000
102. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for 2007 was
Notespayable,short-term 85,000 P900,000, and the ending inventory at December 31, 2007 was P180,000. What was the inventory turnover for
Prepaidexpenses 15,000 2007?
A. 6.4 C. 5.3
95. The amount of working capital for the companyis: B. 6.0 D. 5.0
a. A. P351,000 C. P211,000
103. Selected information from the accounting records of Petals Company is as follows: Net
b. B. P361,000 D. P336,000 salesfor2007 P900,000
Cost of goods soldfor2007 600,000
96. The company’s current ratio as of the balance sheet date is:
A. 2.67:1 C. 2.02:1 Inventory at December31,2006 180,000
B. 2.44:1 D. 1.95:1 Inventory at December31,2007 156,000
Petals’ inventory turnover for 2007is
97. The company’s acid-test ratio as of the balance sheet date is: a. 5.77times C. 3.67times
A. 1.80:1 C. 2.02:1
b. 3.85times D. 3.57times
B. 2.40:1 D. 1.76:1

104. The Moss Company presents the following data for2007.

Activity ratios
NetSales,2007 P3,007,124
Receivables turnover
98. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of P5,000,000 for the year. NetSales,2006 P 930,247
The Accounts Receivable balances at the beginning and end of the year were P600,000 and P700,000, Cost of GoodsSold,2007 P2,000,326
respectively. The receivables turnoverwas
Cost of GoodsSold,2007 P1,000,120
a. 7.7times. C. 9.3times.
Inventory, beginningof2007 P 341,169
b. 10.8times. D. 10.0times.
Inventory, endof2007 P 376,526
99. Milward Corporation’s books disclosed the following information for the year ended December 31, 2007: The merchandise inventory turnover for 2007 is:
Netcreditsales P1,500,000 A. 5.6 C. 7.5
Netcashsales 240,000 B. 15.6 D. 7.7
Accounts receivable at beginningofyear 200,000
Accounts receivable at endofyear 400,000
Milward’s accounts receivable turnoveris
a. 3.75times C. 5.00times
b. 4.35times D. 5.80times

Days receivable
100. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the beginning of the
year and a balance of P410,000 at the end of the year. The net credit sales during the year amounted to
P4,000,000.Using 360-day year, what is the average collection period of the receivables?
a. 30days C. 73days
b. 65days D. 36days

Cash collection
101. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in accounts
receivable of P1,000, increase in inventories of P4,000, and depreciation expense of P4,000. What was the
cash collected fromcustomers?
a. A. P31,000 C. P34,000
b. B. P35,000 D. P25,000

576
 Financial Statement Analysis

What is the debt ratio?

105. Based on the following data for the current year, what is the inventoryturnover?
A. 0.48 C. 0.93
Net sales on accountduringyear P500,000
B. 0.49 D. 0.96
Cost of merchandise soldduringyear 330,000
Accounts receivable, beginningofyear 45,000
Accounts receivable, end of year 35,000 Times interest earned
Inventory, beginning of year 90,000 xviii.House of Fashion Company had the following financial statistics for 2006:
Inventory, end of year 110,000 Long-term debt (average rate of interest is 8%) P40
0,00
0
A. 3.3 C. 3.7 Interest expense 35,0
00
B. 8.3 D. 3.0 Net income 48,0
00
Income tax 46,0
00
Days inventory Operating income 107,
000

107. Selected information from the accounting records of Eternity Manufacturing Company follows: Deferredincometaxes 10,000
Netsales P3,600,000
Preferredstock 80,000
Cost ofgoodssold 2,400,000
Commonstock 100,000
Inventories atJanuary1 672,000
Premium oncommonstock 180,000
Inventories atDecember31 576,000
Retainedearnings 170,000
What is the number of days’ sales in average inventories for theyear?
A. 102.2 C.87.6
B. 94.9 D. 68.1

Turnover
ratios
Asset
turnover
rarios
108. Netsales are P6,000,000,beginning total assets are P2,800,000,and thevasset turnover is 3.0. What is the ending
total asset balance?
A. P2,000,000. C. P2,800,000.
B. P1,200,000. D. P1,600,000.

Solvency ratios
Debt ratio
109. Jordan Manufacturing reports the following capital structure:
Current liabilities P100,000
Long-term debt 400,000
577
 Financial Statement Analysis
What is the times interest earned for 2006?
a. 11.4times C. 3.1times
b. 3.3times D. 3.7times

110. Brava Company reported the following on its incomestatement:

Incomebeforetaxes P400,000
Incometaxexpense 100,000
Netincome P300,000

An analysis of the income statement revealed that interest expense was P100,000. Brava Company’s
times interest earned (TIE) was
a. 5times C. 3.5times
b. 4times D. 3times

111. The balance sheet and income statement data for Candle Factory indicate the following: Bonds payable,
10% (issued 1998due2022) P1,000,000
Preferred 5% stock, P100 par (no changeduringyear) 300,000
Common stock, P50 par (no changeduringyear) 2,000,000
Income before income taxforyear 350,000
Income taxfor year 80,000
Commondividendspaid 50,000
Preferreddividendspaid 15,000

Based on the data presented above, what is the number of times bond interest charges were earned
(round to one decimal point)?
A. 3.7 C. 4.5
B. 4.4 D. 3.5

112. The following data were abstracted from the records of Johnson Corporation for theyear:

578
 Financial Statement Analysis
2006 2007
Sales P1,800,000
Bondinterestexpense 60,000 on their investments.

Incometaxes 300,000 C. The dividend yield is 12.5%, which is of interest tobondholders.

Netincome 400,000 D. The dividend yield is 8.0 times the market price, which is important in solvencyanalysis.

Market Test Ratios

How many times was bond interest earned?
Market/Book value
A. 7.67 C. 12.67
ratioPrice per share
B. 11.67 D. 13.67 115. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity
of P3,000,000, and a market/book ratio of3.5?
Net income a. A. P8.57 C.P85.70
113. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for b. B. P30.00 D.P105.00
theyearwasP20,000,andthecompany’staxrateis40%.Thecompany’snetincomeis:
a. A. P22,000 C. P54,000 P/E ratio
b. B. P42,000 D. P66,000 116. Orchard Company’s capital stock at December 31 consisted of thefollowing:

Profitability Ratios Common stock, P2 par value; 100,000 shares authorized, issued, andoutstanding.
10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares
Return on Common Equity authorized, issued, andoutstanding.
114. SelectedinformationforIvanoCompanyasofDecember31isasfollows: Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per
Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000 share on December 31. Orchard’s net income for the year ended December 31 was P50,000. The yearly
noncumulative preferred dividend was declared. No capital stock transactions occurred. What
Commonstock 600,000 800,000 was the price earnings ratio on Orchard’s common stock at December31?

On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock and 50,000
Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for 2007 is shares of noncumulative and nonconvertible preferred stock issued and outstanding.
A. 17% C. 21% Additional information:
B. 19% D. 23% Stockholders’ equityat12/31/07 P4,500,000
Net income yearended12/31/07 1,200,000
Dividend yield
Dividends on preferred stock yearended12/31/07 300,000
The following information is available for DuncanCo. 2006 Market price per share of common stockat 12/31/07 144
Dividends per share ofcommonstock P1.40 Market price per share ofcommon stock 17.50 The price-earnings ratio on common stock at December 31, 2007, was
A. 10 to1 C. 14 to1
115. Which of the following statements is correct? B. 12 to1 D. 16 to1
A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in market price of Payout ratio
theirstocks. 117. SelectedfinancialdataofAlexanderCorporationfortheyearendedDecember31,2007,
B. The dividend yield is 8.0%, which is of special interest to investors seeking currentreturns

579
 Financial Statement Analysis
is presented Sales/total assets 1.5X
P900,000 3%
below: Operating Return on assets(ROA)
income
Interest expense (100,000) Return on equity (ROE) 5%
Income before income taxes 800,000 The Orange Company’s debt ratio is
Income tax (320,000) A. 40% d. C. 35%
Net income 480,000 B. 60% e. D. 65%
Preferred stock dividend (200,000)
Net income available to common stockholders 280,000 LeverageRatio

Common stock dividends were P120,000. The payout ratio is: Degree of financial leverage
f. 42.9percent C. 25.0percent 119. A summarized income statement for Leveraged Inc. is presentedbelow.
g. 66.7 percent D. 71.4percent Sales P1,000,000
CostofSales 600,000
P/E ratio & Payout ratio
GrossProfit P400,000
Use the following information for question Nos. 33 and 34:
Terry Corporation had net income of P200,000 and paid dividends to common stockholders of P40,000 in OperatingExpenses 250,000
2007. The weighted-average number of shares outstanding in 2007 was 50,000 shares. Terry Corporation’s OperatingIncome P150,000
common stock is selling for P60 per share in the local stock exchange.
InterestExpense 30,000
115. Terry Corporation’s price-earnings ratiois EarningsBeforeTax P120,000
a. 3.8times C. 18.8times
b. 15times D. 6times IncomeTax 40,000
NetIncome P 80,000
116. Terry Corporation’s payout ratio for 2007is
a. P4pershare C. 20.0percent The degree of financial leverage is:
b. 12.5 percent D. 25.0percent A. P 150,000 ÷P30,000 C. P1,000,000 ÷P400,000
B. P 150,000÷ P120,000 D. P 150,000 ÷ P80,000
DuPont Model
Other Ratios
Debt ratio
117. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset turnover Book value per share
remain unchanged at 8% and 1.25 respectively, by how much must the total debt ratio increase to achieve 120. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: 6% cumulative
20%ROE? preferred stock, P100 par, liquidatingvalue
was P110 per share; issued and outstanding 50,000shares P5,000,000
a. Total debt ratio must increase by.5 Common stock, par, P5 per share; issuedand outstanding,400,000shares
b. Total debt ratio must increase by5 2,000,000
c. Total debt ratio must increase by5% Retainedearnings 1,000,000
d. Total debt ratio must increase by50% Total P8,000,000
Dividends on preferred stock have been paid through 2006.
118. Assume you are given the following relationships for the OrangeCompany: At December 31, 2007, M Corporation’s book value per share was
A. P5.50 C.P6.75
B. P6.25 D. P7.50

121. The following data were gathered from the annual report of DeskProducts.

580
 Financial Statement Analysis
Market price per P3 Current liabilities P120,000
share Number of 0. Inventory turnover (based on cost of sales) Gross 8times
profit margin
common shares 00 40%
Mildred’s net sales for the year were
Preferred stock, 5% 10
P100 par Common ,0
equity 00
P1
0,
00
0
P1
40
,0
00
The book value per share is: A. P 800,000 C. P480,000
A. P30.00 C. P14.00 B. P 672,000 D.P1,200,000
B. P15.00 D. P13.75

Net sales
Integrated ratios 124. Selected data from Mildred Company’s year-end financial statements are presented below. The difference
Liquidity & activity between average and ending inventory is immaterial.
ratiosInventory
122. The current assets of Mayon Enterprise consists of cash, accounts receivable, and inventory. The following Currentratio 2.0
information isavailable: Quickratio 1.5
Creditsales 75% of totalsales
Inventoryturnover 5times
Workingcapital P1,120,000
Currentratio 2.00 to 1
Quickratio 1.25 to 1
AverageCollectionperiod 42days
Workingdays 360
The estimated inventory amount is:
A. 840,000 C. 720,000
B. 600,000 D. 550,000

123. The following data were obtained from the records of SalacotCompany:
Current ratio (atyearend) 1.5 to1
Inventory turnover based on sales and endinginventory 15 times
Inventory turnover based on cost of goods sold and ending inventory 10.5 times Gross
marginfor2007 P360,000

What was Salacot Company’s December 31, 2007 balance in the Inventory account?
A. P120,000 C. P80,000
B. P 54,000 D. P95,000

581
 Financial Statement Analysis
Gross margin
125. Selected information from the accounting records of the Blackwood Co. is as follows:
Net A/R at December31,2006 P 900,000
Net A/R at December31,2007 P1,000,000
Accountsreceivableturnover 5 to1
Inventories at December31,2006 P1,100,000
Inventories at December31,2007 P1,200,000
Inventoryturnover 4 to1

What was the gross margin for 2007?

A. P150,000 C. P300,000
B. P200,000 D. P400,000

Market Test Ratio

Dividend yield
126. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio of 75%. The
dividend yieldis
A. 25.0% C.7.5%
B. 22.0% D.10.0%

127. The following were reflected from the records of Salvacion Company:
Earnings before interestandtaxes P1,250,000
Interestexpense
250,000
Preferreddividends 200,000
Payoutratio 40percent
Shares outstanding throughout 2006
Preferred 20,000
Common 25,000
Incometaxrate 40percent
Priceearningsratio 5times

The dividend yield ratio is

A. 0.50 C.0.40

582
 Financial Statement Analysis

B. 0.12 D.0.08 000

Retainedearnings 300,000 210,000Net
Comprehensive income is P115,000 and interest expense is P30,000 for2007.
128. The balance sheets of Magdangal Company at the end of each of the first two years of operations indicate
thefollowing: What is the rate earned on total assets for 2007 (round percent to one decimal point)?
2007 2006
A. 9.3percent C. 8.9percent
B. 10.1 percent D. 7.4percent

130. What is the rate earned on stockholders' equity for 2007 (round percent to one decimal point)?
A. 10.6 percent C. 12.4percent
B. 11.2 percent D. 15.6percent

131. What is the earnings per share on common stock for 2007, (round to two decimal places)?
A. P1.92 C. P1.77
Total current P 129. P56
B. P1.89 D. P1.42
assets Total 6 0,0
investments 0 00 132. . If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round to one decimal
point)?
0 40,
A. 17.0 C. 12.4
, 000
B. 12.1 D. 15.9
0
0
0
6
0
,
0
0
0
Total property, plant, and equipment 900,00 700
0 ,00
0
Total current liabilities 150,00 80,
0 000
Total long-term liabilities 350,00 250
0 ,00
0
Preferred 9% stock, P100 par 100,00 100
0 ,00
0
Common stock, P10 par 600,00 600
0 ,00
0
Paid-in capital in excess of par-common stock 60,000 60,

583
 Financial Statement Analysis

581
 Financial Statement Analysis

584