Financial Statements Analysis-I__ 145 Ill. Problems Problem 1 (Percentage Changes) Selected information taken from financial statements of Little Company for two successive years follows. You are to compute the percentage change from 2018 to 2019 whenever possible, . 2019 2018 a. Accounts receivable. P126,000 P 150,000 b. Marketable securities.. -0- 250,000 c. Retained earings 80,000 (80,000) d. Notes receivable 120,000 -0- e. Notes payable 860,000 800,000 ff 82,400 80,000 & 990,000 900,000 Problem 2 (Computing and Interpreting Rates of Change) Selected information from the financial statements of Yellow Harvest includes the following: 2019 2018 Net sales..... 2,200,000 2,000,000 Total expenses. 1,998,000 1,800,000 Required: a. Compute the percentage change in 2019 for the amounts of (1) net sales and (2) total expenses. b. Using the information developed in part a, express your opinion as to whether the company’s net income for 2019: _ 1. Increased at a greater or lower percentage rate than did net sales. 2. Represented a larger or smaller percentage of net sales revenue than in 2018. For each answer, explain your reasoning without making any computations or references to peso amounts. Scanned with CamScanner146 Chapter 4 Problem 3 (Financial Statement Analysis using Comparative Statemen or Increase-Decrease Method) ts The following data are available for XYZ Corporation for years 2019 ang 2018. XYZ Corporation Statement of Financial Position As of December 31 Assets Cash and equivalents Receivables Inventories Prepayments and others Total Current Assets Property, Plant & Equipment - net of depreciation Total Assets Liabilities and Equity Notes payable to banks Accounts payable Accrued liabilities Income taxes payable Total current liabilities Share capital Retained earnings Total,equity Total liabilities and equity 2018 14,000 28,800 54,000 4,800 101,600 30,200 131,800 10,000 31,600 4,200 5,800 51,600 44,600 35,600 80,200 131,800 2019 16,000 55,600 85,600 7,400 164,600 73.400 238,000 54,000 55,400 6,800 7,000 123,200 44,600 70,200 114,800 238,000 Change Peso % 2,000 2 26,800 93.06% ? 2 2,600 54.17% iz 62.01% 43,200 , 143.05% 2 ? 44,000 — 440.00% 23,800 ? 2,600 61.90% ? ? ? 2 0 0.00% 34,600 ? 34,600 43.14% ? ? Scanned with CamScannerFinancial Statements Analysis — 1 _147 XYZ Corporation Income Statement Years ended December 31 ( thousands) Change Peso” % 2018 2019 Net sales 266,400 424,000 157,600? Cost of goods sold 191,400 314,600 123,200 64.37% Gross profit 75,000 109,400 2 2 Selling, general and administrative 35,500 _58,400 2 64.51% expenses ; Income before income =» 39,500 51,000 11,500 29.11% taxes Income taxes 12,300 _16,400 4,100 33.33% . Net Income 27,200 _34,600 ? 2 Required: ; 1. Compute the missing changes in peso amounts and percentages in the above statements. 2. Evaluate the company’s short-term financial position, leverage, managerial efficiency and profitability using the increase-decrease method of analysis. Problem 4 (Trend Percentages) Spooky Company’s sales, current assets and current liabilities (all in thousands of pesos) have been reported as follows over the last five years (Year 5 is the most recent year): a YearS Year4 Year3 Year2 Yearl Sales... P4950 P4725 4,500 Current assets: Cash. P72 P 84 P 88 P 80 Accounts “560 496 + 432 «=« «416400 receivable. Inventor 816 864 __800 P1332 PL368 PL.280 P.324 P.330 P30 Total current assets. Current liabilit Scanned with CamScanner148 Chapter 4 Required: 1. Express all of the asset, liability, and sales data in trend percentages (Show percentages for each item.) Use Year | as the base year, and carry computations to one decimal place. 2. Comment on the results of your analysis. Problem 5 (Use of Trend Percentages) Instruction: Study the following selected unrelated groups of department store data and point out favorable or unfavorable tendencies: 2016 2017-2018 ~_—2019—_—~2020 a. Receivables, Net (P) 75,150 88,270 90,340 98,430 100,910 Trend (%) 100 117 120 131, 134 Merchandise Invty. (P) 52,330 59,280 99,670 120,240 151,450 Trend (%) 100 113+. 190. 230 289 Fixed Assets, Net (P) 271,420 275,310 290,440 - 292,670 287,310 Trend (%) 100 102 107 108 106 Net Sales (P) 280,910 291,680 295,810 380,470 540,100 Trend (%) 100 104 105 135 192 Net Income (P) 31,150 38,130 36,360. 51,670 82,620 Trend (%) 100 122 NN7 166 265 b. Current Assets (P) 151,670 182,920° 240,260 290,140 355,110 Trend (%) 100 121 158 191 234 Current Liabilities (P) 102,820 125,160 138,930 146,820 165,960 Trend (%) 100 122 135 143 161 Total Noncurrent Assets, Net (P) 361,420 382,240 471,320 $80,960 940,670 Trend (%) 100 106 130 161 260 120,150 110,000 100,000 90,000 — 80,000 1s Trend (%) 100 110 83 or Equity (P) 300,120 329,550 472,650 634,280 1,049,820 “Trend (%) oo 01872380 Net Sales (P) 186,710 188,630 195,430 210, % , . ,690 230,330 Trend (%) 100 101 105 13 123 Scanned with CamScannerFinancial Statements Analysis—1__ 149 2016 2017-2018 ~_—2019'~—2020 c. Net Sales (P) 301,650 325,710 375,240 378,960 401,280 Trend (%) 100 108 124 126 133 Cost of Goods Sold(P) 173,750 185,130 220,180 229,170 244,810 Trend (%) Woo 10712713214 Selling Expenses (P) 45,000 56,400 59,400 65,810! 77,120 Trend (%) oo 1251132, 46H General & administrative expenses (P) 15,000 16,510 © 19,570 21,240 24,160 Trend (%) 100 110 130 142 161 Operating income (P) 67,900 69,470 76,270 62,740 55,190 Trend (%) 100 102 112 92 81 Net Income (transferred to Retained Earnings) (P) 15,140 20,670 16,820 9,915 1,270 Trend (%) 100 137 Ml 65 8 ~ WV. Multiple Choice 1. The data from comparative financial statements are useful a. To analyze changes in gross'and net earnings over a number of accounting periods. b. To analyze the sources of increase in assets. c. To indicate earnings trends and costs trends for the firm. d. _ Inaccomplishing all of the above. e. In accomplishing (a) and (b) above. 2. Index numbers are used in a. trend analysis. ~ b. ratio analysis. c. vertical analysis. d. — common-size statements. 3. “Trading on the equity” (financial leverage) is likely to be a good financial strategy for shareholders of corporations with: a. Rapidly growing amounts of net income. b. Steady but low amounts of net income. : c. Widely fluctuating net income over a short period of time. d. Steadily declining amounts of net income. Scanned with CamScanner150 Chapter 4 4, Select one with the CORRECT statement. a. An industry with a low turnover if operating assets would be expected to have a lower rate of operating percentage of sales than in industry with high operating assets turnover. b. An increase in the rate of operating earnings as a percentage of sale may accompany a decrease in operating earnings measured in absolute pesos. c. The ratio of net earnings to sales is one of best measures for _ comparing the profitability of different companies without regard to the sources of assets. d. Net earnings as a percentage of sales measures the number of centavos of net earnings on each unit of product sold. Comparing performance with industry norms is complicated by a, the existence of diversified companies. b, the use of different accounting procedures by different companies. c. the fact that companies in the same industry will usually differ in some respect. d. allofthe above, Which of the following would probably not be found in a company’s annual report? a. The auditor’s report b. __ A five-or ten-year summary of operations. c. _ Interim financial statements. — d. Analysis of the past year’s operations. What is the first step in an analysis of financial statements? a. Check the auditor’s report. b. Check references containing financial information. c. Specify the objectives of the analysis. — d. Doacommon size analysis. What is a creditor's objective in performing an analysis of financial statements? a. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. — b. To determine the firm’s capital structure, c. To determine the company’s future earnings system. d, To decide whether the firm has operated profitably in the past. Scanned with CamScannerFinancial Statements Analysis—I__ 151 What is an investor’s objective in financial statement analysis? a, To determine if the firm is risky. b. To determine the stability of earnings, c, To determine changes necessary to improve future performance. d. To determine whether an investment is warranted by estimating a company’s future earnings stream. Which of the following is not a tool or technique used by a financial statement analyst? a. Common size financial statements. b. Trend analysis. c. . Random sampling analysis, —_ d. Industry comparisons. In each of the past five years, the net sales of Beta Co. have increased at about half the rate of inflation, but net income has increased at approximately nvice the rate: of inflation. . During this period, the company’s total assets, liabilities and equity have remained almost unchanged; dividends are approximately equal.to net income. These relationships suggest (indicate all correct answers): a. Management is successfully controlling costs and expenses, —— b. The company is selling more merchandise every year. c. The annual return on assets has been increasing. _ d. Financing activities are likely to result in a net use of cash. = _ Holly Corporation’s net income was P400,000 in 2018 and P160,000 in 2019. What percentage increase in net income must Holly achieve in 2020 to offset the decline in profits in 2019? a. 60% c. 600% b. 150% __ 4. 67%, In financial statement analysis, the most difficult of the following items to predict is whether: a. The company’s market share is increasing or declining. b.. The company will be solvent in six months. ¢. — Profits will increase in the coming year. d. The market price of share capital will rise or fall over the next months, — Scanned with CamScanner6. The debt ratio 1s useful to creditors as well as to stockholders, but each of these groups places somewhat different emphasis on it. 7. Short-term creditors generally are more concemed with vertical analysis than with horizontal analysis. 8. Horizontal analysis is possible for both an income statement and a statement of financial position. 9. Common-size financial statements show peso change in specific items from one year to the next. 10, A company with a 2.0 current ratio will experience a decline in the current ratio when a short-term liability is paid. Ill, Problems Problem 1 (Common Size Income Statements) Prepare common size income statements for Wise Company, a sole proprictorship, for the two years shown below by converting the peso amounts into percentages, For each year, sales will appear as 100% and other items will be expressed as a percentage of sales. (Income taxes are not involved as the business is not incorporated.) Comment on whether the changes from 2018 to 2019 are favorable or unfavorable, 2019 2018 PS00,000 P400,000 tof Be 330,000 268,000 Gross profit ..... P170,000 P132,000 Operating expenses . 140,000 116,000 Net income 230,000 P16,000 4, Scanned with CamScannerFinancial Statements Analysis - 1199 Problem 2 (Measures of Liquidity) Some of the accounts appearing in the year-end financial statements of Frozen Delight Company appear below. This list includes all of the company’s current assets and current liabilities, Sales... P1,980,000 ‘Accumulated depreciation: 370,000 Notes payable (due in 90 days)... 70,000 Retained earnin; 221,320 Cash. 47,600 Share capi 150,000 Marketable securities 175,040 ‘Accounts payable. 125,430 Mortgage payable (due in 15 years), 320,000 Salaries payable. 7,570 Dividends...... 25,000 Income taxes payable 14,600 Accounts receivable 230,540 Inventory... 179,600 Unearned revenue 10,000 Unexpired insurance > 4,500 Required: a. Prepare a schedule of the company’s current assets and current liabilities. Select the appropriate items from the above list. b. Compute the current ratio and the amount of working capital. Explain how each of these measurements is computed. State, with reasons, whether you consider the company to be in a strong or weak current position. Scanned with CamScanner200 Chapter 5 Problem 3 (Common-Size Income Statement) A comparative income statement is given below for Rainbow Company: Rainbow Company Comparative Income Statement For the Years Ended June 30, 2019, and 2018 2019 P5,000,000 3,160,000 1,840,000 Selling expenses. 900,000 Administrative expenses 680,000 Total expenses. Net operating income. 260,000 Interest expense... 20,000 Net income before taxes. P_190,000 2018 4,000,009 2,400,009 1,600,009 700,000 $84,000 1.284.000 316,000 — 40,000 P276,009 The president is concerned that net income is down in 2019 even though sales have increased during the year. The president is also concerned that administrative expenses have increased, since the company made a concerted effort during 2019 to pare “fat” out of the organization. Required: I, Express each year’s income statement in common-size percentages. Carry computations to one decimal place. 2. Comment briefly on the changes between the two years. Scanned with CamScannerFinancial Statements Analysis - 11 201 Problem 4 (Comparing Operating Results with Average Performance in the Industry) Ms. Freeze, Inc., manufactures camping equipment. Shown below for the current year are the income statement for the company and a common size summary for the industry in which the company operates. (Notice that the percentages in the right-hand column are not for Ms. Freeze, Inc., but are average percentages for the industry.) Ms. Freeze, Industry Inc. Average Sales (net). P 20,000,000 100% Cost of goods sol 9,800,000 ST) Gross profit on sales. P10,200,000 43% Operating expenses: Selling... P 4,200,000 16% General and administrative. 3,400,000 20 Total operating expenses... P_ 7,600,000 36% Operating income. P 2,600,000 ™m Income taxes 200,000 3 Net income... P_1,400,000 4% Return on assets ... 23% 14% Required: a. Prepare a two-column common size income statement. The first column should show for Ms. Freeze, Inc., all items expressed as a percentage of net sales. The second column should show the equivalent industry average for the data given in the problem. The purpose of this common size statement is to compare the operating results of Ms. Freeze, Inc., with the average for the industry. b. Comment briefly on differences between Ms. Freeze, Inc., and the industry average with respect to gross profit on sales, selling expenses, general and administrative expenses, operating income, net income, and Tetum, on assets. Suggest possible reasons for the more important disparities. Scanned with CamScanner202 Chapter 5 Problem 5 (Common-Size Statements) ValuePlus, Inc., was organized several years ago to develop and market computer software programs. The company is small but growing, and you are considering the purchase of some of its ordinary shares as an investment, The following data on the company is available for the past two years: VALUEPLUS, INC. Comparative Income Statement For the, Years Ended December 31, 2019 and 2018 Sales... Less cost of goods sold .. Gross margin .. Less operating expenses. ‘Net operating income Less interest expense. Net income before taxes. Less income taxes (30%: Net income...... 2019 2018 P10,000,000 P7,500,000 6,500,000 4,500,000 3,500,000 3,000,000 2,630,000 2,280,000 870,000 720,000 120,000 120,000 750,000 600,000 225,000 180,000 VALUEPLUS, INC. Comparative Retained Earnings Statement For the Years Ended December 31, 2019 and 2018 Retained earnings, January 1.. Add net income (above) Preference dividends Ordinary dividends. Total dividends paid Retained earnings, December 31 2019 2018 P1,200,000 P 980,000 $25,000 __ 420,000 1,725,000 _1,400,000 60,000 60,000 180,000 _140,000 240,000 200,000 1.485.000 ‘1,200,000 oT Scanned with CamScannerFinancial Statements Analysis - IT 203 VALUEPLUS, INC. Comparative Statement of Financial Position December 31, 2019 and 2018 Assets ‘Current assets; Cash. Accounts receivable, net. Inventory..... Prepaid expenses Total current asset Plant and equipment, n Total assets... Liabilities and Equity Liabilities: Current liabilities. Bonds payable, 12%... Total liabilities Equity: Preference shares, 8%, P10 par Ordinary shares, PS par Retained earnings .. Total equity Total liabilities and equity. 2019 2018 P 100,000 P 200,000 750,000 400,000 1,500,000 600,000 ——50,000 2,400,000 1,250,000 2,585,000 2,700,000 4,985,000 3,950,000 P1,250,000 P 500,000 1,000,000 1,000,000 2,250,000 1,500,000 750,000 750,000 500,000 500,000 1,485,000 1,200,000 = 2,735,000 2,450,000 4,985,000 3,950,000 The president of ValuePlus, Inc., is very concerned, Sales increased by P2.5 million during 2019, yet the company’s net income increased by only 105,000. Also, the company’s operating expenses went up in 2019, even though a major effort was launched during the year.to cut costs. Required: 1. For both 2018 and 2019, prepare the income statement and the statement of financial position in common-size form. (Round computations to one decimal place.) 4 From your work in (1) above, explain to the president why the increase in profits was so small in 2019. Were any benefits realized from the company’s cost-cutting efforts? Explain. Scanned with CamScanner204 Chapter 5 Problem 6 (Solvency of Alabang Supermarket) Alabang Supermarket, Inc., is one of the Philippines’ largest supermarket chains. Shown below are selected items adapted from a recent Alabang ‘Supermarket statement of financial position. (Peso amounts are in millions.) Cash. P 748 Receivables ; 1527 Merchandise inventories .. 11918 Prepaid expenses 955 Fixtures and equipment. 2,592.9 Retained earnings. 2844 Total current liabilities 1.9390 Required: a. Using the information above, compute the amounts of Alabang ‘Supermarket’s total current assets and total quick assets. 'b. Compute the company’s (1) current ratio, (2) quick ratio, and (3) working capital. (Round to one decimal place.) c. From these computations, are you able to conclude whether Alabang ‘Supermarket is a good credit risk for short-term creditors or on the brink of bankruptcy? Explain, . d. Is there anythifig unusual about the operating cycle of supermarkets that would make you think that they normally would have lower current ratios than, say, large department stores? e. What other types of information could you utilize in performing a more complete analysis of Alabang Supermarket’s solvency? Problem 7 (Statement of Financial Position Measures of Liquidity and Credit Risk) A recent statement of financial position of Bonbon Sweets, Inc., included the following items, among others, (Peso amounts are stated in thousands.) pa7,s24 55,926 23,553 32,210 Inventories. 4 Scanned with CamScannerFinancial Statements Analysis - I] _205 Prepaid expenses 5,736 Retained earnings. 121,477 Notes payable to banks (due within one year) .. 20,000 Accounts payable 5,912 Dividends payabl 1,424 Accrued liabilities (short-term) 21,532 Income taxes payable... 6,438 ‘The company also reported total assets of P353,816 thousand, total liabilities of P81,360 thousand, and a return on total assets of 18.1%. Required: a. Compute Bonbon Sweet’s (1) quick assets, (2) current assets, and (3) current liabilities. b. ‘Compute Bonbon Sweet’s (1) quick ratio, (2) current ratio, and (3) working capital, and (4) debt ratio. (Round to one decimal place.) c. Discuss the company’s liquidity from the viewpoints of (1) short-term creditors, (2) long-term creditors, and (3) shareholders. Problem 8 (Selected Financial Measures for Short-term Creditors) Victory Products had a-current ratio of 2.5 to 1 on June 30 of the current year. On that date, the company’s assets were as follows: Cash. P 80,000 Accounts receivable. 530,000 Less allowance for doubtful accounts.. 70,000 460,000 Inventory 750,000 Prepaid expense: 10,000 Plant and equipment, n¢ 1,900,000 Total assets. 3,200,000 Required: 1. What was the company’s working capital on June 30? 2. “What was the company’s acid-test ratio on June 30? 3. The company paid an account payable of P100,000 immediately after June 30. Scanned with CamScanner206 Chapter 5 ‘a. What effect did this transaction have on working capital? Show computations. b. What effect did this transaction have on the current ratio? Show ‘computations. Problem 9 (Selected Financial Ratios) Recent financial statements for Marina Company are given below: Marina Company Statement of Financial Position June 30, 2018 P 21,000 160,000 300,000 9,000 490,000 810,000 B1.300,000 Property and equipment, net Total assets.. Liabilities and Equity Liabilities: P 200,000 300,000 500,000 P100,000 700,000 800,000 1,300,000 4 Scanned with CamScannerFinancial Statements Analysis - I 207 Marina Company Income Statement For the Year Ended June 30, 2018 Sales.. 2,100,000 Less cost of goods sold 1.260.000 Gross margi 840,000 Less operating expenses.. 660,000 ‘Net operating income. 180,000 Less interest expenses ‘000 Net income before taxes.. 150,000 Less income taxes 45,000 Net income... P_J05,000 Account balances at the beginning of the.company’s fiscal year were: accounts receivable, P140,000; and inventory, P260,000. All sales were on account. 9 Required: : Compute the following financial ratios: 1. Gross margin percentage. 2. Current ratio. 3. Acid-test (quick) ratio, 4. Accounts receivable turnover in days. 5. Inventory turnover in days. 6. Debt-to-equity ratio. : 7. Times interest earned. 8. Book value per share. Problem 10 (Selected Financial Ratios for Ordinary Shareholders) Refer to the financial statements for Marina Company in Problem 9. In addition to the data in these statements, assume that Marina Company paid dividends of P3.15 per share during the year. Also assume that the company’s ordinary shares had a market price of P63 per share on June 30 and there was no change in the number of outstanding ordinary shares during the fiscal year, Scanned with CamScanner208 _ Chapter 5 Required: Compute the following: 1, Earnings pet share. 2. Dividends payout ratio. 3. Dividend yield ratio. 4, Price-earnings ratio. Problem 11 (Selected Financial Ratios for Ordinary Shareholders) Refer to the financial statements for Marina Company in Problem 9. Assets at the beginning of the year totaled P1,100,000, and the equity totaled P725.000. Required: ‘Compute the following: 1, Return on total assets. 2. Return on ordinary shareholders’ equity. 3. Was financial leverage positive or negative for the year? Explain. Problem 12 (Selected Financial Measures for Short-Term Creditors) Edward Products had a current ratio of 2.5 on June 30 of the current year. On that date, the company’s assets were as follows: Cash P 80,000 Accounts receivable, net 460,000 Inventory 750,000 Prepaid expenses 10,000 Plant and equipment, net * 1,900,000 Total assets Required: |. What was the company’s working capital on June 30? 2. What was the company’s acjd-test ratio on June 30? 3. The company paid an account payable of P100,000 immediately after June 30, a. What effect did this transaction have on working capital? Show computations, . b. What effect did this transaction have on the current ratio? Show computations. Scanned with CamScannerFinancial Statements Analysis = 11 209 Problem 13 (Effects of Transactions on Various Financial Ratios) In the right-hand column below, certain financial ratios are listed. To the left of each ratio is a business transaction or event relating to the operating activities of Eclipse Company. ae bepe 10. oth 16. 17, Inventory was sold for cash at a profit. Land was purchased for cash. Inventory was sold on account at cost. ‘Some accounts payable were paid off. A customer paid an overdue bill. A cash dividend was declared, but not yet paid. . A previously declared cash dividend was paid. The company’s ordinary share price increased. |. The company’s ordinary share price increased. Earnings per share remained unchanged. Property was sold for a profit. Obsolete inventory was written off as a loss. . Bonds were sold with an interest rate less than the company’s return on assets. . The company’s ordinary share price decreased. The dividend paid per share remained the same. . The company’s net income decreased, but long-term debt remained unchanged. . An uncollectible account was written off against the Allowance for Bad Debts. Inventory was purchased on credit. The company’s ordinary share price iticreased. Earnings per share remained unchanged. The company paid off some accounts payable. Debt-to-equity ratio Earnings per share Acid test ratio Working capital Average collection period Current ratio Current ratio Book value per share Dividend yield ratio Return on total assets Inventory turnover ratio Return on ordinary shareholders’ equity Dividend payout ratio Times interest earned Current ratio Acid-test ratio Price-earnings ratio Debt-to-equity ratio Scanned with CamScanner210 _ Chapier 5 Required: Indicate the effect that each transaction or event would have on the ratio listed opposite to it. State the effect in terms of increase, decrease, or no effect on the ratio involved, and give the reason for your choice. In all cases, assume that the current assets exceed current liabilities both before and after the event or transaction. Use the following format for your answers: Effect on Ratio Reason for Increase, Decrease or No Effect 1. 12 (te. Problem 14 (Interpretation of Financial Ratios) Being a prudent investor, Alice Meyer always investigates a company thoroughly before purchasing shares for investment. Ms. Meyer is interested in the ordinary shares of Hale Enterprises. The following data are available for the company: Year 3 | Year 2 | Year] Current ratio 28|_25| 2.0 Acid-test ratio o7{_o9| 12 Accounts receivable turnover. 8.6 95 | 104 Inventory turnover 5.0 57] 6.8 Sales trend 130.0 | 118.0 | 100.0 Dividends paid per share* P2.50| 2.50 |_P2.50 Dividend yield ratio | 4%| 3% Dividend payout ratio 40% 50% | 60% Return on total assets 13.0% | 11.8% | 10.4% Retumn on ordinary shareholders” equity 16.2% | 14.5% | 9.0% * There were no changes in ordinary shares outstanding over the three-year period. Mrs. Meyer would like answers to a number of questions about the trend of events over the last three years in Hale Enterprises. Her questions are as follows: a. Is the market price of the company’s share going up or down? b. Is the earnings per share increasing or decreasing? Scanned with CamScannerFinancial Statements Analysis - II 241 Is the price-earnings ratio going up or down? Is the company employing financial leverage to the advantage of the ordinary shareholders? Is it becoming easier for the company to pay its bills as they come due? Are customers paying their bills at least as fast now as they did in Year 1? g. Is the total of the accounts receivable increasing, decreasing, or remaining constant? h. Is the level of inventory increasing, decreasing, or remaining constant? ae me Required: Answer each of Ms. Meyer’s questions and explain how you arrived at your answer. . Cases Case 1 (Common-Size Statements and Financial Ratios for Creditors) Metro Building Supply sells various building materials to retail outlets. The company has just approached Prime Bank requesting a P300,000 loan to strengthen the Cash account ‘and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follows: METRO BUILDING SUPPLY Comparative Statement of Financial Position This Year Last Year Assels Current assets: Cash... Marketable securities. P 90,000 P. 200,000 0 50,000 Accounts receivable, net 650,000 400,000 Inventory. 1,300,000 800,000 Prepaid expenses 20,000 20,000 Total current assets... 2,060,000 1,470,000 1,940,000 _1,830,000 24,000,000 3,300,000 Plant and equipment, net.. Total assets... + Liabilities and Equity Liabilities: Current liabi P1,100,000 P 600,000 Scanned with CamScanner212 _ Chapter 5 Bonds payable, 12% . _750,000 Total liabi ities . 1,850,000 Equi Preference shares, P50 par, 8% 200,000 Ordinary shares, P10 par . . $00,000 Retained earnings .. ‘ 1.450.000 Total equity. 2.15 Total liabilities and equi 4,000,000 METRO BUILDING SUPPLY Comparative Income Statement This Year Sales... P7,000,000 Less cost of goods sold 5,400,000 Gross margin 1,600,000 Less operating expense: 970,000 ‘Net operating income 630,000 Less interest expense. 90.000 Net income before taxes. 540,000 Less income taxes (40%). 1 Net income... 324,000 Dividends paid: Preference dividen 16,000 Ordinary dividends 108.000 Total dividends paid.. 24,000 Net income retained .. 200,000 Retained earnings, beginning of year. 1,250,000 Retained earnings, end of year... PL450,000 750,00 1,350,000 200,000 500,000 1,250,000 1,950,000 P3,300,000 Last Year 6,000,000 4,800,000 1,200,000 710,000 490,000 90,000 400,000 160,000 240,000 16,000 60,000 76,000 164,000 1,086,000 21,250,000 During the past year, the company has expanded the number of lines.that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers, Sales terms are 2/10, n/30. All sales are on account, d Scanned with CamScannerFinancial Statements Analysis - I 213 Assume that the following ratios are typical of firms in the building supply industry: Current ratio Acid-test rati Average age of receivables .. Inventory turnover in day: Debt-to-equity ratic Times interest earned Return on total assets Price-earnings ratic Net income as a percentage of sale: 6.0 times 10% 9 - 4% Required: 1, Prime Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following ratios for both this year and last year: a. The amount of working capital. . The current ratio. The acid-test ratio. The average age of receivables. (The accounts receivable at the beginning of last year totaled P350,000.) e. The inventory turnover in days. (The inventory at the beginning of last year totaled P720,000.) f. The debt-to-equity ratio. g. The number of times interest was earned. aes 2. For both this yéar and last year (carry computations to one decimal place): a. Present the balance in common-size form. b. Present the income statement in common-size form down through net income. 3. From your analysis in (1) and (2) above, what problems or strengths do you see existing in Metro Building Supply? Make a recommendation as to whether the loan should be approved. Scanned with CamScanner214 Chapter 5 Case 2 (Financial Ratios for Ordinary Shareholders) Refer to the financial statements and other data in Case 1. Assume that you have just inherited several hundred shares of Metro Building Supply stock, Not being acquainted with the company, you decide to do some analytical work before making a decision about whether to retain or sell the stock you have inherited. Required: 1. You decide first to assess the well-being of the ordinary shareholders. For both this year and last year, compute the following: a. The earnings per share, b. The dividend yield ratio for ordinary. The company’s ordinary share is currently selling for P45 per share; last year it sold for P36 per share, The dividend payout ratio for ordinary. d. The price-earnings ratio. How do investors regard Metro Building Supply as compared to other firms in the industry? Explain. e. The book value per share of ordinary. Does the difference between market value and book value suggest that the stock at its current price is too high? Explain. ° 2. You decide next to assess the company’s rate of return. Compute the following for both this year and last year: a. The return on total assets. (Total assets at the beginning of last year were P2,700,000,) b. The return on ordinary equity. Shareholders’ equity at the beginning of last year was P1,786,000.) c. Is the company’s financial leverage positive or negative? Explain. 3. Based on your analytical work (and assuming that you have no immediate need for cash), would you retain or sell the stock you have inherited? Explain, Scanned with CamScannerFinancial Statements Analysis - 245 Case 3 (Comprehensive Ratio Analysis) You have just been hired as a loan officer at Luzon Bank. Your supervisor has given you a file containing a request from Helix Company, a manufacturer of auto components, for a P1,000,000 five-year loan, Financial statement data on the company for the last two years are given below: HELIX COMPANY Comparative Statement of Financial Position This Year Last Year Asses Current assets: Cash. P 320,000 P 420,000 Marketable securities 0 100,000 Accounts receivable, net. 900,000 600,000 1,300,000 800,000 80,000 60,000 Total current assets, 2,600,000 1,980,000 Plant and equipment, net 3,100,000 2,980,000 Total assets, 5,700,000 + P4,960,000 Liabilities and Equity Liabilities: Current liabiliti P1,300,000 P 920,000 Bonds payable, 10% 1,200,000 1,000,000 Total liabilities... 2,500,000 _1,920,000 Equity: Preference shares, 8%, P30 par value. 600,000 600,000 Ordinary shares, P40 par valu: 2,000,000 2,000,000 Retained earnings 4a 600,000 __440,000 3,200,000 3,040,000 5,700,000 4,960,000 Scanned with CamScanner216 Chapter 5 HELIX COMPANY Comparative Income Statement This Year Last Year 5,250,000 4,160,000 Sales (all on account Less cost of goods sold 4,200,000 _3,300,000 Gross margi 1,050,000 860,000 Less operating expenses. 530,000 __520,000 Net operating income 520,000 340,000 Less interest expense. 120,000 100,000 ‘400,000 240,000 120,000 ___72,000 Less income taxes (30%) 280,000 168,000 Net income... Dividends paid: Preference shares 48,000 48,000 Ordinary shai 72,000 36,000 Total dividends paid. 120,000 84,000 ‘Net income retained 160,000 84,000 Retained earnings, beginning of yes 440,000 356,000 Retained earnings, end of year... P600,000 — P_440,000 Meri Ramos, who just two years ago was appointed president of Helix Company, admits that the company has been “inconsistent” in its performance over the past several years. But Ramos argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% increase in sales over the last year. Ramos also argues that investors have recognized the improving situation at Helix Company, as shown by the jump in the price of its ordinary shares from P20 per share last year to P36 per share this year. Ramos believes that with strong leadership and with the modernized equipment that the P1,000,000 Joan will permit the company to buy, profits will be even stronger in the future. Anxious to impress your supervisor, you decide to generate all. the information you can about the company. You determine that the following ratios are typical of companies in Helix’s industry: 1 2.3 to | 1.2tol 31 days a Scanned with CamScannerFinancial Statements Analysis - 217 inventory turnover. Return on assets Debt-to-equity rati Times interest earned Price-earnings rati 60 days 9.5% 0.65 to 1 5.1 10 Required: 1. You decide first to assess the rate of return that the company is generating. Compute the following for both this year and last year: a. ‘The retum on total assets. (Total assets at the beginning of last year were P4,320,000:) b. The return on ordinary equity. (Equity at the beginning of last year totaled P3,016,000. There has been no change in preference or ordinary share over the last two years.) c. Is the company’s leverage positive or negative? Explain. 2. You decide next to assess the well-being of the sedinary shareholders. For both this year and last year, compute: a. The earings per share. b. The dividend yield ratio for ordinary. c. The dividend payout ratio for ordinary. , d. The price-earnings ratio, How do investors regard Helix Company as compared to other firms in the industry? Explain. e. The book value per share of ordinary. Does the difference between market value per share and book value per share suggest that the stock at its current price is a bargain? Explain. f. The gross margin percentage. You decide, finally, to assess creditor ratios to determine both short-term and long-term. debt paying ability. For both this year and last year, compute: a. Working capital. b, The current ratio, ¢. The acid-test ratio. d. The average age of receivables. (The accounts receivable at the beginning of last year totaled P520,000.) e. The inventory turnover. (The inventory at the beginning of last year totaled P640,000.) 3. Scanned with CamScanner218 Chapter 5 f. The debt-to-equity ratio. g. The number of times interest was earned. 4, Evaluate the data computed in (1) to (3) above, and using any additional data provided in the problem, make a recommendation to your supervisor as to whether the loan should be approved. Case 4 (Statement Reconstruction Using Ratios) ‘The following ratios and other data pertain to the financial statements of the Bulacan Company for the year ended December 31, 2018. © Current ratio 1.75 to 1 Acid-test ratio 1.27 to 1 Working capital 33,000 Fixed assets to equity ratio * 0,625 to 1 Inventory turnover (based on cost of closing inventory) 4x Gross profit percentage » 40% Earnings per share 0.50 Average age of outstanding accounts receivable (based on calendar year of 365 days) 7B days Share capital outstanding 20,000 no par value shares Earnings for the year as a percentage of share capital 25% The company has no prepaid expenses, deferred, intangible assets or long- term liabilities. Required: Reconstruct in as much detail as is possible the company’s statement of financial position and income statement for the year ended December 31, 2013, show supporting computations in good form. Case 5 (Ethics and the Manager) Swiss, Inc., was founded by Rome Ricardo to produce a specialized roller skate he had designed for doing aerial tricks, Up to this point, Rome has financed the company from his own savings and from retained profits. However, Rome now faces a cash crisis, In the year just ended, an acute Scanned with CamScannerFinancial Statements Analysis - If 219 shortage of roller bearings had developed just as the company was beginning production for the Christmas season. Rome had been assured by the suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers had been unable to fully deliver on this promise. As a consequence, Swiss had large stocks of unfinished skates at the end of the year and had been unable to fill all of the orders that had come in from retailer for the Christmas season.. Consequently, sales were below expectations for the year, and Rome does not have enough cash to pay his creditors. . ‘Well before the accounts payable were to become due, Rome visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Rome that there should not be any problem getting a loan to pay off his accounts payable — providing that on his most recent-financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Rome promised to return later with a copy of his financial statements. Rome would like to apply for a P80,000 six-month loan bearing an interest rate of 10% per year. The unaudited financial reports of the company appear below: SWISS, INC. Comparative Statement of Financial Position As of December 31 (pesos in thousands) 2019 2018 Assets Current assets: Cash... aie P70 PISO Accounts receivable, net 30 40 Inventory. 160 100 Prepaid expenses 10 12 Total current assets 290 302 270 180 B560 482 Scanned with CamScanner220 Chapter 5 Liabilities and Equity Current liabilities: Accounts payable. PIS4 P 90 Accrued payables. 10 10 Total current li 164 100 ‘Long-term liabilit te nee Total liabilities. 164 100 Equity: Ordinary shares and additional paid-in capital 100 100 Retained earings 296 282 Total equity 396 _382 Total liabilities and equi 560 482 HELIX COMPANY , ‘Comparative Income Statement For the Year Ended December 3] (Pesos in thousands) This Year Sales (all on account).. P420 290 130 Selling expenses... 42 Administrative expense: 68 Total operating expenses. “T10 ‘Net operating income......... 20 Net income before taxes ~20 Less income taxes (30%) 6 Net income... Pu Required: 1, Based on the above unaudited financial statements and the statement made by the Joan officer, would the company qualify for the loan? 2. Last year Rome purchased and installed new, more efficient equipment to replace an older plastic injection molding machine. Rome had originally planned to sell the old machine but found that it is still needed Scanned with CamScannerFinancial Statements Analysis - IH 221 whenever the plastic injection molding process is a bottleneck. When Rome discussed his cash flow problems with his brother-in-law, he suggested to Rome that the old machine be sold or at least reclassified as inventory on the statement of financial position since it could be readily sold, At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of P45,000. The bank does not require audited financial statements. What advice would you give to Rome concerning the machine? Case 6 (Financial Ratios for Ordinary Shareholders) Comparative financial statements for Washington Services for the fiscal year ending December 31 appear below. The company did not issue any new ordinary or preference share during the year. A total of 600 thousand ordinary shares were outstanding. The interest rate on the bond payable was 14%, the income tax rate was 40%, and the dividend per ordinary share was P0.75. The market value of the company’s ordinary share at the end of the year was P26. All of the company’s sales are on account. Washington Services . Comparative Statement of Financial Position (pesos in thousands) This Year Last Year Assets Current assets: Cash : P 1,080 P 1,210 Accounts receivable, net 9,000 6,500 Inventory 12,000 10,600 Prepaid expenses 800 500 . Total current assets 22.680 18.810 Property and equipment: te 9,000 9,000 Buildings and equipment, net 36.800 38,000 Total property and equipment 45,800 47,000 Total assets 268.480 P6S,810 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable P18,500 P17,400 Accrued payable 4 900 700 Notes payable, short term og — 10 Total current liabilities 19,400 18,200 Lm Scanned with CamScanner222 _Chapter 5 Long-term liabilities: * Bonds payable — 8.000 Total liabilities 21.400 Shareholders’ equity: Preference shares 1,000 Ordinary shares 2,000 Additional paid-in capital Total paid-in capital 7,000 Retained earings 34,080 Total shareholders’ equity 410 Total liabilities and shareholders’ equity 68,480 Washington Services Comparative Statement of Financial Position (pesos in thousands) This Year Last Year Sales 66,000 64,000 Cost of goods sold 43.000 42,000 Gross margin 23,000 ~22,000 Selling and administrative expenses: Selling expenses 11,500 11,000 Administrative expenses 1.400 Total selling and administrative expenses 18,900 18,000 Net operating income 4,100 4,000 Interest 800 800 Net income before taxes 3,300 3,200 Income taxes 1,320 1,280 Net income 1,980 1,920 Dividends to preference shareholders 60 400 ‘Net income remaining for ordinary shareholders 1,920 1,520 Dividends to ordinary sharcholders 450 450 ‘Net income added to retained earnings 1,470 1,070 Retained earnings, beginning of year 32,610 _31540 Retained earnings, end of year 34,080 32,610 Required: Compute the following financial ratios for ordinary shareholders for this year: 1, Gross margin percentage, 2. Earnings per ordinary share, 3. Price-earnings ratio, Scanned with CamScannerFinancial Statements Analysis - I _223 Dividend payout ratio. Dividend yield ratio. Return on total assets. Return on ordinary shareholders’ equity. Book value per share. SrA Case 7 (Financial Ratios for Short-Term Creditors) Refer to the data in Case 6 for Washington Services. Required: Compute thé following financial data for short-term creditors for this year: Working capital. Current ratio. Acid-test ratio. Accounts receivable turnover. (Aston that all sales are on account.) Average collection period. . Inventory turnover. 1. Average sale period. rayaeye Case 8 (Financial Ratios for Long-Term Creditors) Refer to the data in Case 6 for Washington Services. Required: Compute the following financial ratios for long-term creditors for this year: 1, Time interest earned ratio. 2. Debt-to-equity ratio. V. Multiple Choice 1. What are the common size financial statements? a. Statements that express each account on the statement of financial position as a percentage of total assets and each account on the income statement as a percentage of net sales. b, Statements that standardize financial data in terms of trends. c. Statements that relate the firm to the industry in which it operates. d. — Statements based on common sense and judgment. Scanned with CamScanner224 Chapter 5 & Which of the following is not revealed on a common size statement of financial position? a, The debt structure of a firm. b. The capital structure of a firm. c. The peso amount of assets and liabilities, d. The distribution of assets in which funds are invested. What is a serious limitation of financial ratios? a. _ Ratios are screening devices. b. _ Ratios can be used only by themselves. c. _ Ratios indicate weaknesses only. d. Ratios are not predictive. What is the most widely used liquidity ratio? a. Quick ratio. b. Current ratio. c. Inventory turnover. d. Debt ratio. ‘What is a limitation common to both the current and the quick ratio? a. Accounts receivable may not be truly liquid. b. Inventories may not be truly liquid. c. Marketable securities are not liquid. d. Prepaid expenses are potential sources of cash. Why is the quick ratio a more rigorous test of short-run solvency than the current ratio? a. The quick ratio considers only cash and marketable securities as current assets, b. The quick ratio eliminates prepaid expenses for the numerator. c. The quick ratio eliminates prepaid expenses for the denominator, d. The quick ratio eliminates inventories from the numerator. What does an increasing collection period for accounts receivable suggest about a firm’s credit policy? a. The credit policy is too restrictive, b. The firm is probably losing qualified customers. ¢. The credit policy may be too lenient, d. Te collection period has no relationship to a firm’s credit policy, Scanned with CamScannerFinancial Statements Analysis- 225 Which of the following statements about inventory turnover is false? a. Inventory tumover measures the efficiency of the firm in managing and selling inventory. b, Inventory turnover is a gauge of the liquidity of a firm's inventory. c. Inventory turnover is calculated with either cost of goods sold or net sales in the numerator. 4: A low inventory tumover is generally a sign of efficient inventory management. Which of the following is not a reason for a high inventory tumover ratio? a. Stockpiling inventory. Decrease in prices. b. “¢, Understocking inventory. d. Shortage of materials. What do the asset turnover ratios measure? a. _ The liquidity of the firm’s current assets. b. . Management’s effectiveness in generating sales? from investments in assets. c. The overall efficiency and profitability of the firm. d. The distribution of assets in which funds are invested. Which of the following ratios would not be used to measure the extent of a firm’s debt financing? a. Debt ratio : b. Debt to equity c. Times interest earned d. Long-term debt to total capitalization Why is the amount of debt in a company’s capital structure important to the financial analyst? a. Debt implies stock. b, Debt is less costly than equity. c. Equity is riskier than debt. d. — Debt is equal to total assets. Scanned with CamScanner226 Chapter 5 13. Why is the fixed charge coverage ratio a broader measure of a firm’s coverage capabilities than the times interest earned ratio? ‘The fixed charge ratio indicates how many times the firm can cover interest payments. b. The times interest earned ratio does not consider the possibitity of higher interest rates. c. The fixed charge ratio includes lease payments as well as interest payments. d. The fixed charge ratio includes both operating and capital leases while the times interest earned ratio includes only operating leases. 14. Which profit margin measures the overall operating efficiency of the firm? a. Gross profit margin. b. Operating profit margin. c. Net profit margin. d. Return on equity. 15. Which ratio(s) measures the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders? a. Gross profit margin and net profit margin. b. Return on investment. ¢. Total asset turnover and operating profit margin. d, Return on investment and return on equity. 16. What does a financial leverage index greater than “1” indicate about a firm? a. The unsuccessful use of financial leverage. b. Operating returns more than éufficient to cover interest payments on borrowed funds, ¢c. More debt financing than equity financing. d. An increased level of borrowing. 17. What does the price to earnings ratio measure? a The “multiple” which the stock market places on a firm’s earnings. . The relationship between the dividends and market prices. ¢. The earnings for one ordinary share. d. The percentage of dividends paid to net earnings of the firm. Scanned with CamScannerFinancial Statements Analysis - I__227 Use the following data to answer questions 18 through 21. ETC Corporation Selected Financial Data December 31, 2018 Current assets P150,000 Current liabilities 100,000 Inventories 50,000 Accounts receivable 40,000 Net sales 900,000 Cost of goods sold 675,000 18, ETC’s current ratio is: ‘ a 1.0tol. b. 0.7 to 1. ce ILStol. d 24tol. 19. ETC’s quick ratio is: a L0tol. * b. 0.7tol. c. “15tol, d. 2.4tol. 20, _ ETC’s average collection period is: “a. 6 days. b. 11 days. c. 16 days. d. 22 days. 21. ETC’s inventory turnover is: a. 1.25 times. b, 13.5 times. c. 3.0 times. d. 37.5 times. Scanned with CamScanner228 Chapter 5 Use the following data to answer questions 22 through 25. 22. 23. 24. 25. ‘SPF Corporation Selected Financial Data, December 31, 2018 Net sales P1,800,000 Cost of goods sold 1,080,000 Operating expenses 315,000 Net operating income 405,000 Net income 195,000 Total equity 750,000 Total assets, 1,000,000 Cash flow from operating activities 25,000 SPF’s gross profit margin, operating profit margin, and net profit margin, respectively are: a. 40.00%, 22.50%, 19.50%. b. 60.00%, 19.50%, 10.83%. c. 60.00%, 22.50%, 19.50%. d. 40.00%, 22.50%, 10.83%. ‘SPF’s return on equity is: a 26%. b. 54%. c 42%. a 19%. SPF’s return on investment is: a 225%. b. 265%. ce. 19.5%. a. 40.5%. SPF’s cash flow margin is: a 14%. b. 2.5%. c. 10.8%, d. 12.8%, =d Scanned with CamScannerFinancial Statements Analysis - II__229 26. Which of the following usually is least important as a measure of short-term liquidity? a. Quick ratio b. Current ratio c. Debt ratio d, Cash flows from operating activities 27, The following data are available from the annual report of Azul Marine: i P300,000 240,000 80,000 Which of the following statements are correct? (More than one statement may be correct.) a. . The return on equity exceeds the return on assets. b. The current ratio is 0.625 to 1. c. Working capital is P1,200,000, d. None of the above answers is correct. 28, If acompany’s current ratio declined in a year during which its quick ratio. improved, which of the following is the most likely explanation? ‘a. Inventory is increasing. b. Inventory is declining. c. Receivables are being collected more rapidly than in the past. d. Receivables are being collected more slowly than in the past. 29. A firm’s current ratio at the end of any given accounting period a. _ Is generally greater than the acid test ratio of that firm for the same period. Is never smaller than the acid test ratio for the same period. Is always equal to the working capital ratio for that date. All of the above are true. Only (a) and (b) are true. sees 30, A company has a current ratio of 2 to | at the end of Year 1. Which of the following transactions will increase this ratio? a. Sale of bonds payable at a discount. b. Declaration of a 50% stock dividend. Scanned with CamScanner230_ Chapter § wy r . Collection ofa large account receivable. @. Borrow cash from bank, issuing a six-month note. Jn projecting the future profitability of a merchandising company, investors generally will be least concerned with potential increases in: 1. The rate earned on sales. b. The rate earned on total assets. ©. The quick ratio. é. Sales volume. A conversion of a company’s short-term note payable into a long- term note payable would 2. Decrease only working capital, b. Decrease both working capital and the current ratio. c. _ Increase only working capital. 4. _ Increase both working capital and the current ratio. A company has a current ratio of 2 to 1. This ratio will decrease if the company : 2. Receives a 5% stock dividend on one of its” marketable securities. ' b. Pays a large account payable which had been a current liability. c. Borrows cash on a six-month note. d. Sells merchandise for more than cost and records the sale using the perpetual inventory method. ‘Assuming stable business conditions, a decline in the number of days’ sales outstanding in accounts receivable at year-end from one year to the next might indicate: a. A stiffening of credit policies, b. The second year’s collection period is a longer period than the first year’s collection period, ¢. That a longer discount period and a longer credit period were offered to customers in the second year. d, A decrease in the volume of sales in the second year. Scanned with CamScannerFinancial Statements Analysis - I 231 35. What is the effect of the collection of accounts receivable on the current ratio and net working capital, respectively? Current ratio Net working capital * No effect No effect db Increase Increase c Increase No effect d. No effect Increase 36. A corporation purchased its own shares of stocks in the open market at a price greater than book value per share. Its book value per share and earnings per share would be affected to the extent that a. book value and EPS decrease. b. book value remains the same but EPS increases. c. both book value and EPS increase. d. — book value per share decreased and EPS increased. €. answer not given. Iiems 37 through 41 are based on the following information: The December 31, 2018, statement of financial Position of Trend, Inc. is presented below.. These are the only accounts in Trend’s statement of fi inancial position. Amounts indicated by question mark (?) can be calculated from the additional information given. Assets: Cash P 25,000 Accounts receivable (net) 2 Inventory ‘i a Property, plant and equipment (net) 194,000 Total 432,000 Liabilities and Equity: Accounts payable (trade) Re Income taxes payable (current) 25,000 Long-term debt 2 Ordinary shares Retained earnings 1 Total Scanned with CamScanner132 Chapter 5 ‘Additional Information: Current ratio (at year end) 1.5tol Total liabilities divided by total equity 0.8 Inventory turnover based on sales and ending inventory 15 times Inventory turnover based on cost of goods sold and ending inventory 10.5 times Gross margin for 2018 315,000 37, _ What was Trend’s December 31, 2018 balance in trade accounts payable? a. P67,000 ©. P182,000 b. P92,000 d. 207,000 38. What was Trend’s December 31, 2018 balance in retained earnings? : a. P60,000 deficit c. P132,000 b. 60,000 d. — P130,000 39. What was Trend’s December 31, 2018 balance in the inventory account? a. 138,000 cP 70,000 b. P 70,000 d. 135,000 40. The balance of Accounts Receivable as of December 31, 2018 is a. P138,000. c. P 43,000. b. P 70,000. dP 34,000. 41. _ The balance of Long-term debt as of December 31, 2018 is a. P300,000. c. P100,000. b. P192,000. 4. 230,000. Scanned with CamScannerFinancial Statements Analysis - 233 1. Problems Problem I The Dawn Company mines selum, a commonly used mineral. Following is the ‘company’s report of operations: The Dawn Mining Company Report on Operations For the Years Ended December 31, 2016 and 2015 Increase 2016 2015. (Decrease) Net Sales P891,000 -P840,000-—-P51,000 Cost of Goods Sold 688,500 945,000 (256,500) Gross Profit (Loss) 202,500 (105,000) P307,500 The following information pertains to the company’s operations: 1. The sales price of selum was increased from P8 per ton to P11 per ton on January 1, 20}6. 2. New mining machinery was placed in operation on January 1, 2016 which reduced the cost of mining from P9 per ton to P8.50 per ton. 3. There was no change in ending inventories which where valued on the FIFO basis. ‘ Required: Prepare an analysis accounting for the change in gross profit of the Dawn Mining Company, The analysis should account for the effects of the changes in price, volume and volume-price factors upon (1) sales and (2) cost of goods sold. (AICPA adapted) Scanned with CamScanner234 _ Chapter 5 Problem II The comparative statement of gross profit of the Arrow life Co. for the years ending December 31, 2015 and 2016 is as follows: 2015 2016 Net Sales P150,000 P210,000 Cost of Sales 132,000 ° 164,000 Gross Profit P.18,000 P_46,000 A general increase of 5% was made on all selling prices effective January 1, 2016. At the same time, a new plant manager was engaged who did much during the year in reducing plant costs. An argument arose between the new plant manager and the vice-president in charge of sales at the end of 2016. They agreed that three factors in all increased the gross profit, but the plant manager insists that the savings in manufacturing, costs were greater in amount than the increase in gross profit due to increased volume of sales, while the vice-president is equally insistent that the opposite is true. You are asked to calculate the amount of increase in gross profit attributable to each of the factors separately, e.g. (a) selling price. (b) cost, and (c) volume of sales. Problem II Determine cause of profit variation for Tony Corporation using the following data: 2015 2016 Net Sales 192,500 210,210 Cost of Sales 115,500 165,400 Gross Profit P.77,000 44,810 Unit sales price decreased by 22% Required: A. Prepare the Gross Profit Variation Analysis. B. Compute the percent of change in: 1, Volume 2. Unit Costs Scanned with CamScanner =Financial Statements Analysis- Il _235 Problem IV You are preparing your long-term report in connection with the audit of the City Gas Company at December 31, 2016. The report will include an explanation of 2015 increase in operating revenues, ‘The following is available from the company records: Increase 2015 2016 (Decrease) ‘Average no. of customers 27,000 26,000 (1,000) MCF (thousand citbic feet) 486,000 520,000 34,000 Revenue (Sales) P1,215,000 —_P1,274,000 P59,000 Required: To explain the 2016 increase in operating revenues, prepare an analysis for the effect of changes 1. Average number of customers. 2. Average gas consumption per customer.~ 3. Average rate per MCF sold. Il. Multiple Choice 1. The following gross margin data were taken from the income statements of a retailing firm X & Y, Inc. for two periods. PeriodA Period B P150,000 —P141, 750 100,000 P_91,000 If sales volume declined by 10% on Period B, the percentage of change in selling price is: : a, , 10% increase c. 5.5% increase b. 5% increase d, 5% increase Sales revenue. Scanned with CamScanner236 _ChapterS Item 2 and 3 are based on the following data: 2016 2015 208,000 P200,000 Cost of Sales. 175,500. 150,000 P.32,000 P.50,000 Gross profit. Unit selling price decreased by 20% in 2016. 2 The net change in gross profit in 2016 due to quantity factor is: a. P60,000 increase. c. — P40,000 decrease. b. — P15,000 increase. d. —P 8,000 increase. 3. * “The change in gross profit due to the decrease in selling price is: a. 8,000 increase c. — P52,000 decrease b. — P60,000 increase d. — P52,000 increase Use the following information for questions 4 through 8. Data for X Company follow: Product A Product B 2015 2016 20152016 Unit sold 10,000 20,000 10,000 15,000 Unit selling price PIO PIS PIS Plo Unit cost PS P70 PIS PB 4. The increase (decrease) in gross profit in 2016 is a. 70,000, c. — P(110,000). b. P180,000. d. P110,000. 5. The sales price factor is a. — P25,000 favorable , ¢. — P200,000 favorable. b. — P25,000 unfavorable, d. — P200,000 unfavorable. 6. — The cost price factor is a. 25,000 unfavorable . b. — P25,000 favorable, a ee ee = Scanned with CamScannerFinancial Statements Analysis - 11 237 ‘The increase (decrease) in gross profit due to change in overall quantity sold is a. (52,500) - ¢ — P90,000 b. — P52,500 d. 40,000 The sales mix factor is a. P35,000 unfavorable. c. P 7,500 unfavorable. b. P.7,500 favorable. d. — P35,000 favorable. Scanned with CamScanner