BACC103 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

PROBLEM 1: TRUE OR FALSE

1. TRUE Financial statements are useless to a person who does not know how to interpret the
information contained in the report.
2. TRUE When making business decisions, an entrepreneur will need various sources of
information. A major source of information is the financial statements.
3. FALSE A comparison of information from one period to another is called vertical analysis.
4. FALSE An analysis of the interrelationships of information in a single period, expressed as
percentages of a common denominator, is called horizontal analysis.
5. FALSE Entity A reported inventory balances of ₱100 and ₱50 in 20x1 and 20x0, respectively. In
a horizontal analysis, a financial statement user would conclude that Entity A’s inventory has
increased by 50% from 20x0 to 20x1.
6. TRUE In 20x1, Entity A reported sales of ₱100 and profit of ₱20. In a vertical analysis, a
financial analysis statement user would conclude that Entity A was able to generate 20% profit from
every peso of its sales during the period.
7. FALSE At the beginning of the day, you have ₱20 cash in your pocket. At the end of the day,
you have ₱5 left. If you make a horizontal analysis of your pocket, you would conclude that your
cash has decreased by 80% during the day. 75%

Fact pattern:
Your Papa gave you an allowance of ₱10, good for one week. By the end of the week, you have ₱2 left.
The following were your expenditures during the week:
 Transportation - ₱4
 Snacks - ₱3
 Text (cellphone load) - ₱1
8

8. FALSE In a vertical analysis, you would conclude that out of your total allowance, 40% is spent
on snacks. 30%
9. TRUE In a vertical analysis, you would conclude that out of your total allowance, you spent
80% and saved 20%.
10. FALSE You will give back the ₱2 excess allowance to Papa.

PROBLEM 2: TRUE OR FALSE

1. FALSE Current ratio is the most commonly used ratio in measuring an entity’s liquidity. Current
ratio is computed as current assets less current liabilities.
2. TRUE The Quick ratio (Acid-test ratio) has a similar purpose to that of the Current ratio.

Use the following information for the next two questions:

Entity A has total current assets of ₱100 and total current liabilities of ₱25.

3. TRUE Entity A’s current ratio is 4.

4. FALSE Entity A’s working capital is ₱125. 75

5. TRUE Short-term solvency or liquidity refers to an entity’s ability to pay it’s short-term
obligations.
6. TRUE Activities ratios provide a measure of how efficient a business is utilizing its resources.
BACC103 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

7. TRUE A high inventory turnover rate is generally favorable, unless other facts and
circumstances dictate otherwise.

Use the following information for the next three questions:

You bought 10 apples for ₱1 each and were able to sell of them for ₱5 each. The only other expense you
incurred is the salary of your helper amounting to ₱15.

8. TRUE Your gross profit rate is 0.80.

9. FALSE Your net profit rate is 0.60. 25/50
10. TRUE When measuring return on investment though financially ratios, profit or loss is
normally used as the numerator.