BM2211

Name Section Date

SAMPLE PROBLEMS ON FINANCIAL RATIOS

1. The management of International Heal Medical Company is evaluating the performance of its three
(3) divisions. The Booboo Division had an operating profit of ₱24,950 and, on average used assets
with a book value of ₱311,900. The Splint Division had an operating profit of ₱17,500 and used
average assets of ₱177,950. The Intensive Care Division had an operating profit of ₱28,500 and
average assets of ₱475,000. The company plans to award the Intensive Care Division, relying on its
high operating profit. Should the management continue with this decision? Justify your answer.

0.079 x 100 = 7.9%

= 0.06 x 100 = 6.0%
0.098 x 100 = 9.8%
No, the management should not
continue awarding the Intensive
Care Division. Because the
Intensive
Care Division's operating proft –
(6%) is so low in comparison to the
other two divisions. And Booboo
Division increased operating proft
by 7.9%, outpacing Intensive Care
Division. The Splint Division
recorded the highest operational
proft at 9.8%. The business must
award Splint Division with the prize
because of its larger operating proft
Booboo Division – 24,950/ 311,900 = 0.079 x 100 = 7.9% or 8%

Intensive Care Division -28,500/475,000 - 0.06 x 100 = 6.0% or 6%

Splint Division - 17,500/177,950 = 0.098 x 100 = 9.8%

No, the management should not continue awarding the Intensive Care Division. Because the
Intensive Care Division's operating profit – (6%) is so low in comparison to the other two divisions.
And Booboo Division increased operating profit by 7.9%, outpacing Intensive Care Division. The
Splint Division recorded the highest operational profit at 9.8%. The business must award Splint
Division with the prize because of its larger operating profit.

2. Charlie’s Construction Company is a growing construction business with a few contracts to build
storefronts in Pasay. Charlie’s balance sheet shows beginning assets of ₱1,000,000 and an ending
balance of ₱2,000,000 assets. During the current year, Charlie’s company had a net income of
₱20,000,000. Compute the company’s return on assets and interpret the results.

Return on Assets (ROA)= Net income/Average total assests

= 20,000,000/ (1,000,000+2,000,000)/2
= 20,000,000/ (3,000,000) /2
=20,000,000/ 1,500,000
= 13.33 or 1333.33%

3. Dave’s Guitar Shop is thinking about building an additional property onto the back of its existing
building for more storage. Dave consults with his banker about applying for a new loan. The bank
asks for Dave’s balance to examine his overall debt levels. Dave’s total assets is P5,000,000 while his
total liabilities is P25,000. Compute Dave’s debt ratio.

Debt Ratio = total liabilities/ total assets

 = 25,000/5,000,000

Debt Ratio = 0.005

Rubric for checking:

CRITERIA POINTS
Complete solution/interpretation with the correct answer 5
The last two (2) major steps of the solution are incorrect/
4
correct answers, but no interpretation was given
Half of the solution is correct 3
The first two (2) major steps of the solution are correct 2
The first major step of the solution is correct 1

07 Activity 2 *Property of STI

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