Pamantasan ng Lungsod ng Maynila Management Advisory Services Pre-finals I. Theories 1. Horizontal analysis is also known as a.

linear analysis c. trend analysis b. vertical analysis d. common analysis 2. Statements in which all items are expected only in relative terms (percentages of a base) are termed: a. Vertical statements c. Funds statements b. Horizontal statements d. Common 3. Vertical analysis is a technique that expresses each item in a financial statement a. In pesos and centavos. b. As a percent of the item in the previous year. c. As a percent of a base. d. Starting with the highest value down to the lowest value. 4. The ratios that are used to determine a company’s short - term debt paying ability are a. Asset turnover, times interest earned, current ratio, and receivables turnover. b. Times interest earned, inventory turnover, current ratio, and receivables turnover. c. Times interest earned, acid-test ratio, current, and inventory turnover. d. Current ratio, acid-test ratio, receivables turnover, inventory turnover. 5. Which of the following reasons should not be considered in order to explain why the receivables appear to be abnormally high? a. Sales volume decreases materially late on the year b. Receivables have collectability problems and possibly some should have been written off c. Material amount of receivables are on the installment basis d. Sales volume expanded materially late in the year 6. The present and prospective stockholders are primarily concerned with a firm’s a. Profitability c. Leverage b. Liquidity d. Risk and return Page 1 of 10

7. The two categories of ratio that should be utilized to asses a firm’s true liquidity are the a. Current and quick ratios b. Liquidity and debt ratio c. Liquidity and profitability ratios d. Liquidity and activity ratios 8. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should a. Improve its collection practices, thereby increasing 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 quick ratios c. Decrease current liabilities by utilizing more long term debt thereby increasing the current and quick ratios d. Increase inventory, thereby increasing current assets and the current and quick ratios 9. Trading on the equity (leverage) refers to the a. Amount of working capital b. Amount of capital provided by owners c. Use of borrowed money to increase the return to owners d. Earnings per share 10. 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 conclude that a. Company A has a higher net income than Company B b. Company A has a lower return on assets than Company B c. Company A is more risky than Company B d. Company A has a lower debt ratio than Company B 11. In a responsibility accounting system, managers are accountable for: a. Variable costs but not for fixed costs b. Costs over which they have significant influence c. Product costs but not for period costs d. Incremental costs 12. The basic purpose of a responsibility accounting system is: a. Budgeting c. Authority b. Motivation d. Variance analysis Page 2 of 10

13. If a manufacturing company uses responsibility accounting, which one of the following items is least likely to appear in a performance report for a manager of an assembly line? a. Supervisory salaries c. Repairs and maintenance b. Materials d. Depreciation of equipment 14. Ordinarily, the most appropriate basis on which to evaluate the performance of a division manager is the division’s: a. Contribution margin b. Net revenue minus controllable division costs c. Gross profit d. Net revenue minus variable division costs 15. In evaluating a profit center or an investment center, top management should concentrate on: a. Peso sales c. Profit percentages b. Net income d. Return on investment 16. Assuming that sales and net income remain the same, a company’s return on investment will: a. Increase if invested capital increases b. Decrease if invested capital decreases c. Increase if invested capital decreases d. None of the above 17. When comparing the residual income of several investment centers, the validity of comparisons may be destroyed by: a. Peculiarities of each investment center b. Differences in the relative amount of income c. Consistent use of an imputed interest rate d. Common amounts of invested capital for each investment center 18. Residual income: a. Is always the best measure of divisional performance b. Is not as good a measure of performance as ROI c. Overcomes some of the problems associated with ROI d. Cannot be used by divisions that deal with others in the same company 19. Which of the following is not a method for developing or estimating the current market value of assets? a. Gross book value c. Liquidation value b. Replacement cost d. Economic value added 20. Return on investment is calculated as Page 3 of 10








a. Divisional operating income/divisional investment b. Divisional investment – divisional income c. Divisional investment/divisional operating income d. Division income – (divisional investment x required rate of return) A project that when accepted or rejected will not affect the cash flows of another project. a. Independent projects c. Mutually exclusive projects b. Dependent projects d. Both b and c The higher the risk element in a project, the: a. More attractive the investment is b. Higher the net present value is c. Higher the cost of capital is d. Higher the discount rate is The normal methods of analyzing investments: a. Cannot be used by not-for-profit entities b. Do not apply if the project will not produce revenues c. Cannot be used if the company plans to finance the project with funds already available internally d. Require forecasts of cash flows expected from the project The primary capital budgeting method that uses discounted cash flow techniques is the: a. Net present value method b. Cash payback technique c. Annual rate of return method d. Profitability index method Cost of capital is: a. The amount the company must pay for its plant assets b. The dividends a company must pay on its equity securities c. The cost the company must incur to obtain its capital resources d. The cost the company is charged by investment bankers who handle the issuance of equity or long-term debt securities In choosing from among mutually exclusive investments the manager should normally select the one with the highest: a. Net present value c. Profitability index b. Internal rate of return d. Book rate of return If a payback period for a project is greater than its expected useful life, the: a. Project will always be profitable Page 4 of 10

b. Entire initial investment will not be recovered c. Project would only be acceptable if the company’s cost of capital was low d. Project’s return will always exceed the company’s cost of capital. 28. The primary advantages of the average rate of return method are its ease of computation and the fact that: a. It is especially useful to managers whose primary concern is liquidity b. There is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short-term c. It emphasizes the amount of income earned over the life of the proposal d. Rankings of proposals are necessary 29. Which of the following would decrease the net present value of a project? a. A decrease in the income tax rate b. A decrease in the initial investment c. An increase in the useful life of the project d. An increase in the discount rate 30. When comparing NPV and IRR, which is not true? a. With NPV, the discount rate can be adjusted to take into account increased risk and the uncertainty of cash flows b. With IRR, c ash flows can be adjusted to account for risk c. NPV can be used to compare investments of various size or magnitude d. Both NPV and IRR can be used for screening decisions II. Problems 1. The following data were abstracted from the records of Johnson Corporation for the year : Sales P1,800,000 Bond interest expense 60,000 Income taxes 300,000 Net income 400,000 How many times was bond interest earned? a. 7.67 c. 12.67 b. 11.67 d. 13.67 2. Orchard Company’s capital stock at December 31of the followings: Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding Page 5 of 10

10% non-cumulative, non-convertible preferred stock, P100 par value, 1,000 shares authorized, issued, and outstanding Orchard’s common stock, which is listed on a major stock exchange, was quoted at P4 per share on December 31. Orchard’s net income for the year ended December 31 was P50,000. The yearly preferred dividend was declared. No capital stock transactions occurred. What was the price earnings ratio on Orchards common stock at December 31? a. 6 to 1 c. 10 to 1 b. 8 to 1 d. 16 to 1 3. The balance sheets of Maygaling Company at the end of each of the first two years of operations the following 2010 2009 Total current assets P600,000 P 560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 70,000 Total current liabilities 150,000 80,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, P100 par 100,000 100,000 Common stock, P10 par 600,000 600,000 Paid-in capital in excess of par CS 60,000 60,000 Retained earnings 300,000 210,000 Net income is P115,000 and interest expense is P30,000 for 2010. What is the rate earned on total assets for 2010 (round percent to one decimal point)? a. 9.3 percent c. 8.9 percent b. 10.1 percent d. 7.4 percent 4. What is the rate earned on stockholder’s equity for 2010 (round percent to one decimal point)? (Refer to information on #3 above) a. 10.6 percent c. 12.4 percent b. 11.2 percent d. 15.6 percent 5. What is the percentage per share on common stock for 2010, (round to two decimal places)? (Refer to information on #3 above) a. P1.92 c. P1.77 b. P 1.89 d. P1.42 Page 6 of 10

6. If the market price is P30, What is the price-earnings ratio on common stock for 2010 (round to one decimal point)? (Refer to information on #3 above) a. 17.0 c. 12.4 b. 12.1 d. 15.9 7. The Value Division of Industrial Company produces a small valve that is used by various companies as a component part in their products. Industrial Company operates its divisions as autonomous units, giving its divisional manager great discretion in pricing and other decisions. Each division is expected to generate a rate of return of at least 14% on its operating assets. The Valve Division has average operating assets of P700,000. The valves are sold for P5 each. Variable costs are P3 per valve and fixed costs total P462,000 per year. The division has a capacity of 300,000 units. How many valves must the Valve Division sell each year to generate the desired rate of return on its assets? a. 280,000 c. 355,385 b. 350,000 d. 265,000 8. Marishka Company that had current operating assets of one million and net income of P200,000 had an opportunity to invest in a project that requires an additional investment of P250,000 and increased net income by P40,000. After the investment, the company’s ROI will be: a. 16.0% c. 19.2% b. 18.0% d. 20.2% Questions 9 – 14 are based on the following information: Pinewood Craft Company is considering the purchase of two difference items of equipment, as described below: Machine A. A compacting machine has just come onto the market that would permit Pinewood Craft Company to compress sawdust into various shelving products. At present the sawdust is disposed of as a waste product. The following information is available on the machine. i. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12-year useful life. The company uses straight-line depreciation and considers salvage value in computing depreciation deductions. ii. The shelving products manufactured from use of the machine would generate revenues of P300,000 per year. Variable manufacturing costs would be 20% of sales. Page 7 of 10

Fixed expenses associated with the new shelving products would be (per year): advertising, P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800. Machine B A second machine has come onto the market that would allow Pinewood Craft Company to automate a sanding process that is now done largely by hand. The following information is available: i. The new sanding machine would cost P234,000 and would have no salvage value at the end of its 13-year useful life. The company would use straight-line depreciation of the new machine. ii. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value of P9,000. iii. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an operator at an annual salary of P16,350 and P5,400 in annual maintenance costs. The current, handoperated sanding procedure costs the company P78,000 per year in total. Pinewood Craft Company requires a simple rate of return of 15% on all equipment purchases. Also, the company will not purchase equipment unless the equipment has a payback period of 4 years or less. (in all the following questions, please ignore income tax effect) 9. The expected income each year from the new shelving products (Machine A) is: a. P52,500 c. P84,000 b. P240,000 d. P92,500 10. The annual savings in cost if Machine B is purchased is: a. P56,250 c. P38,250 b. P43,250 d. P21,750 11. The simple rate of return for Machine A is: a. 12.5% c. 25.0% b. 20.0% d. 18.0% 12. The simple rate of return for Machine B is: a. 16.3% c. 25.0% b. 17.0% d. 34.0% 13. The payback period for Machine A is: a. 3.0 years c. 5.0 years b. 4.5 years d. 7.5 years


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14. The payback period for Machine B is: a. 4.0 years c. 6.1 years b. 4.2 years d. 5.9 years 15. By the end of December 31, 2005, Alay Foundation is considering the purchase of a copying machine for P80,000. The expected annual cash savings are expected to be P32,000 in the next four years. At the end of the four years, the machine will be discarded without any salvage value. All the cash savings are stated in number of pesos at December 31, 2006.The Company expected that the inflation rate is constantly 5 percent each year. Hence, the first year’s cash inflow was adjusted for 5% inflation for simplicity, all cash inflows are assumed to be at year-end. The present value of 1 at end of each period are: Period 1 0.87719 Period 2 0.76947 Period3 0.67497 Period 4 0.59208 Using the nominal rate of return of 14%, the net present value for this machine is a. P12,239 c. P13,419 b. P19,670 d. P27,936 16. Zambales Mines, Inc. is contemplating the purchase of equipment to exploit a mineral deposit that is located on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers 2,750,000 Working capital required 1,000,000 Net annual cash receipts* 1,200,000 Cost to construct new road in three years 400,000 Salvage value of equipment in 4 years 650,000 *Receipts from the sales of ore, less out-of-pocket costs for salaries, utilities, insurance, etc. It is estimated that the mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's discount rate is 20% The net present value for the project is: a. P454,620 b. (P79,303) Page 9 of 10

c. (P561,553) d. (P204,688) 17. A piece of labor equipment that Marubeni Electronics Company could use to reduce costs in one of its plants in Angles City has just come onto the market. Relevant data relating to the equipment follow: Purchase cost of the equipment P432,000 Annual cost savings that will be provided by the equipment 90,000 Life of the equipment 12 years What is the simple rate of return to be provided by the equipment? a. Between 15% and 18% c. 20.83% b. 25.00% d. 12.50% 18. Diamond Company is planning to buy a coin-operated machine costing P400,000.For book and tax purposes, this machine will be depreciated P80,000 each year for five years. Diamond estimates that this machine will yield an annual inflow, net of depreciation and income taxes P120,000. Diamond's desired rate of return on it's investment is 12%. At the following discount rates, the NPV's of the investment in this machine are Discount Rate NPV 12% +3,258 14% +1.197 16% - 708 18% -2,474 Diamond's expected IRR on the investment in this machine is a. 3.25% c. 16.00% b. 12.00% d. 15.30% 19. Moon Company uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are Akda Investments which has a marginal cost of capital of 12 percent is evaluating two mutually exclusive projects (X and Y), which have the following projections. Project X Project Y Investment P 48,000 P83,225 After-tax cash inflow P12,000 P15,200 Asset life 6 years 10 years The indifference point for the two projects is a. 12.64% c. 12.00% b. 16.01% d. 19.33% Page 10 of 10

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