CHAPTER 13 FINANCIAL STATEMENTS ANALYSISae 694 5 involves careful selection of SIS — to assess and evaluate the ALY: ‘ATEMENTS A : ei saan ition, and future business jal statements data from financial state me M seont cone firm’s past performance, its pres potentials n order L STATEMENTS ANALYSIS is to evaluate and forecast the parties, such as the managers, the company’s financial OBJECTIVES OF FINANCIA' ° 6g analysi The primary purpose of FS ai company’s financial health. I investors, and creditors, can} . eine strengths and weaknesses and know al profitability of the business firm; firm's ability to meet its obligations; safety of the investment in the business; and effectiveness of management in running the firm. Bee GENERAL APPROACH TO FINANCIAL STATEMENTS ANALYSIS 1. Evaluation of the environment (industry and economy as a whole) where the company conducts business 2. Analysis of the firm’s short-term solvency 3. Analysis of the company’s capital structure and long-term solvency j 4. Evaluation of the management's efficiency in running the business 5. Analysis of the firm's profitability PROBLEMS AND LIMITATIONS IN FINANCIAL ‘STATEMENTS ANALYSIS 1. Comparison of financial data a. Differences between c i nis ee ee or eompanies ~ 4 ratio that is acceptable to ot be acce Hore se eae acceptable to another when other b. Differences in accounting methods c. Valuation prc fant aluat pblem ~ fj historical costs and the market value and estimates nanci; 5 : iol Statements are based on ‘efore, Ore, do not reflect the current of the firm’s evel assets, ice level changes must he sonia Moreso, the effects of pricet Ratios are not sufticio about the future, Othe to Hmanial Statements Anat Wysis 675 The timing of transactions various techniques in FS. 4 USS OF averages in applying, the analysis affect the results obtained. he need to look beyond ratio atios 1 i Oo WUiN themselves as basis for judgments T factors must be considered, such as: industry trends in technology changes in consumer tastes changes in the economy as a whole changes that are taking place within the company itself changes STEPS IN FINANCIAL STATEMENTS ANALYSIS wpe wn Establish the objectives of the analysis to be conducted. Study the industry where the firm belongs. Study the firm’s background and the quality of its management. Evaluate the firm’s financial statements using the evaluation techniques available. Summarize the results of the studies and evaluation conducted. Develop conclusions relevant to the established objectives. TECHNIQUES USED IN FINANCIAL STATEMENTS ANALYSIS ge wi > HORIZONTAL ANALYSIS It involves comparison of statements of fwo or Me between the figures of U percentage cha’ the earlier period Horizontal Analysis (trend ratios and percentages) Vertical Analysis (common-size statements) Ratio Analysis ; - Analysis of variation in gross profit and net income Cash flow analysis figures shown in. the financial ore consecutive periods, The difference he two periods is calculated, and the eri » the next is computed usin; nge from one period te P " 7 as the base.part 3~ FINANCIAL MANAGER |r, $96 Formula: luc — Base Period Value ri alue a. Percentage _ — ce Period Va Change Increase (Decrease) ' Percent ample fercent — 2008 P 330 11%* sales 3,280 3,280 - P2,950__ _ 1) *percentage Change = P2,950 = VERTICAL ANALYSIS ; ures in the financial statements of a The process of comparing figut 7 ae , 4 period. It involves converting of figures in the Se ha sae e sn base. This is accomplished by expressing all the figures in the statements as percentages, of an important item such as total assets (in the balance sheet) or total or net sales (in the income statement). These converted statements are called common-size statements or percentage composition statements. Example: COMPARE CORPORATION Income Statement For the year Ended December 31, 200B 200B Percent Sales 9 P3,280 100.0% Less cost of sales 21120 64.6 Gross income "354 n P1160 _35.4 Less operating expenses: Selling P 350 10.7 Admini i Total operating expenses ee Pp a s In ome from operations ee ag L. “interest expense P90 oF Income before tax 2 1g Less income tax P 360 108 Net income 126 _38 P2340 it => RATIO ANALYSIS Ratios are calculat ed fror ; of such stateuient ve the financial statements to provide use h relevant information about the firm'schapter 13 ~Financial Statemeny ents Analysis 697 liquidity, use of leye, profitability, growth, Tage, asset management, cost control, and valuation, a. LIQUIDITY RATIOS ~ provi. to pay its ban vee Provide information about the firm’s abi nt obligations and continue operations. Rano Fonua SrauricaNce 1. Current Ratio or : Workin Regine cattal | | Curent Assets___| Test of short-term hee Current Liabilities debt paying ability. Measures the firm's bility to pay its : Quick Assets 4 * One luck Assets"—__| short-term debts from ick Ratio its most liquid assets without having to rely ‘on inventory. * Quick Assets = Cash + Cash Equivalents + Net Receivables + Marketable Securities A more conservative Cash + Cash variation in Quick Equivalents + Ratio, It tests short- Marketable term liquidity without 5 i having to rely on oa ti —ninhee See Current Liabilities | receivables and inventory. Cash + Cash ts + >» Cash to are Measures the liquidity Current eaitines ___| ofcurent assets. Assets Ratio —Ghrrent Assets Caan | Shows the Operate significance of cash + Cash Flow —=—— rabies | flow for settling Ratio Current Labi current obligations as they become due. tf tr become d DT Cash Equivalents + Reflects the net Receivables + | percentage of near- Marketable cash items to the 3, Defensive daly operang cash Interval we698 PAR! > hows the amount of | 3 “- rent investment | ' . Increase IN cul N ent | vod Earnings that was “financed | ~ ciation by depreciation and | 4, Towestment — current increase in retained | Fiance Investment | earnings a | __—--—-——_| A measure of the — liquidity of current [ Weighted Non-Cash assets stated in days. | Current Assets" | tt shows the period- | 5, Liquidity Index Current Assets to-period changes in | an entity’s liquidity. * Non-Cash Current | Assets are weighted by | multiplying their balances by the average days they are removed from conversion to cash. Leverace Ratios - measure the company’s use of debt to finance assets and operations. * Financial Leverage (trading on the equity) - the use of debt to finance assets and operations; It is.advisable to trade on equity when earnings from borrowed funds exceed the cost of borrowing. As leverage increases, the risk borne by creditors, a8 ve as the risk that the firm may not be able to meet its maturing obligations, increases. Since interest expense increases the Is tax deductible, leverage co} fo ™Mpany’s retum when it is profitable. Solvency ~ the firny, y ~ the firm’s financial aby Survive in the long S KEY INGREDIENTS OF Solvency 1. Capirat STRUCTURE obligations and ility to pay long-term term. ~ the sources of fin ancingchapter 13 Fin; ar cial Statements, Analysis 699 a Fquity ithe Kk capital of the firm) - the ‘5 Ownership interest in the firm + Debt ~ the interest of creditors in the tirm EARNING Power = the capacity of the firm’s operations to produce cash intlo 1 . ‘Amount of total + Financial assets financed by | Leverage 7 eee equity, The higher | Ratio or Equity | —LotalAssets__| the ratio, the greater Multiplier or is the leverage | Leverage (assets financed by Factor debt) and the greater the risk. Return on Tf the index exceeds 2. Financial Common 1.0, it is favorable Leverage _—Eauity_____| andthe use of Index Return on financial leverage is Assets successful. Measures the extent bckess to which the assets 3. Interest- bearing Debt_ | having explicit cost bearing Debt Equity + (total capital) are Ratio Interest financed by interest- bearing Debt. | bearing debt. Measures the 2 percentage of funds * Tyo | atm | pew (Capital creditors. | ___(car ‘Compares resources provided by creditors 5. Debt to Equity with resources Ratio provided by ; | shareholders. ——__| Soe] A more conservative measure of long- 6. Debt to term debt-payment * Tangible Net Intangible ability than the debt Worth Ratio Assets ratio or debt to equity ratio. et700 = ings (er. fae Indicates the margin 7 Trerest Interest and of safety fo - Ered Ratio Tax (EBM payin ch; : enters Interest interest charges, Coverage Expense _| | __ Ratio, eT Interest tion Of 8, Fixed Charge Sperating Indicates the margin Coverage Leases of safety for Ratio or i —Tnteret + payment of all fixed eo aS Interest charges. Ratio portion of Operating Leases, th Measures the portion Operating Operating of total liabilities that 9. Ops Ip : Cash Flow to |” Cash Flow __—_| can be paid out of Total Debt Total Debt the cash flows from Ratio operations. c. ASSET MANAGEMENT RATIOS — measure how the firm uses its assets to generate revenue and income oe | Ratio FORMULA SIGNIFICANCE | , ; Indicates if a firm holds 1 ne eet ao or Cost of Sales excessive stocks of inventories Hirt re mover | Average Inventory that are unproductive and that | . lessen the company's | t 4 Profitability. | Number of Days in a Year | ——_aYear | 2. Average Age of Inventory Turnoyer Inveni Ri tuber o Days of | Measures the average number | Inventory i a cays that inventory isheld Average e Invent fore sale. Average Daily Cost ~ ee of Sales 3.R oe Timo ig ~—Net Credit sales oe Average Accounts | Measures the average number — Receivable "| OF ays to collect a cecehapter 13 ~ Financial Statements Analysi ~~ Number of Days 3. Average Age of | ___ ina Year Receivables or Receivables Number of Turnover Ratio —_| reacures the average Days of or number of days to collect Recenvabte:or a receivable. Average Average Accounts Collection Receivable Period Average Sales L 5. Operating the avere Average Age of |_| Measures the average Cycle or Inventories + Average | number of days to convert Conversion ‘Age of Receivables | inventories to cash. Period Average Determines whether the 8 Average AGE OF | accounts Payable | fmm i paying its invoices ‘Average Daily d is, Payable weap OY _| ena tne es Measures the level of use . Fixed Assets a of property, plant, and Turnover Ratio pears equipment. Measures the level of Net Sales__ Bi. “Total Assets Average Total capital investment relative Tumover Ratio "Assets to sales volume. Measures the level ofF total assets having ° ee rato explicit costs relative to sales volume. * Total Capital = total assets having explicit costs (equity + interest-bearing debt)_| ~ Total Capical, 2008 - Total the percentage 10. Investment Capital, 2004 Measures Rate aaa change in total capital. _ 200A _ . —= Amount Measures the percentage Available for of net income available for 11. Plowback Ratio __ Reinvestment __ investment. . Net Income: * Ahigh rate means less external fin So rere nal finNE PAR 702 eastite how well a firm controls aTios = d. Cost MANAGEMENT R its costs ———— SIGNIFICANCE oo FoaMutA ge “ a Measures how much can eee net Sales ~ Cost be spent for marketing, 1, Gross Profit grsales_ | R&D, and administrative ee Gross | —Net Sal costs while still reaching on argeted income. Percentage lh | targeted income. oS) ate tr thet - Labor Cost Measures the percentage 2. Labor Cost ees | of labor cost to sales. | “Ratio Net Sales | . ete a | - Number cf Used as a measure of | Workers, 2008 — operational growth. It is | Number of compared with the 3. Employment Workers, 200A, _| investment rate to Growth Rate ‘Number of determine whether Workers, 200A capital is being substituted for labor. e. PROFITABILITY RATIOS - measure earnings in relation to some base, such as assets, sales, or capital j | Ratio FORMULA SIGNIFICANCE 1. Profit Margin on ee wy ; Net woo. _~ | Measures the percentage | let Saies i a | Pee of net income to sales 2. Net Of Pea -_eBIT Measures the percentage | Sales ‘Net Sal sl of operating income to 3 Retum on = — bin Investment or Return on Total Assets or | ——WetIncome ___| Indicates whether Return on Average Total management is using Invested Assets funds wisely. |___ Capital | el 4. ra pentng eerr A variation of the Retum me to inn on Asset at Talos | ERY rare | Crees no mires be ening Debt bearing debt from total assets, _-S. Marginal —- > Profitability —Change in EBIT ‘A variation of the Net Rate Change in Operating Income to | Capital Total Capital Ratio. || 6. Return on Net Income = Common Preferred Measures the return on Equity ___Dividends __| the carrying ammount of ¢ Average equity. 7. Magner Semon Et te return Conner, _Net Income ___| A variation of the return tity | Change in ‘on common equity. fe |= Common Equity | | Net Income — { Dividends on | 8. Return on | , Redeemable Fotal Equity Preferred Stock Average Total Equity | 9. Economic Net Operating Profit |, measure of the - 3 | Value Added ter en shareholder value EVA) | (EVA) Total Cost of Capital’ -} “eto | * Capital Charge = total | capital employed x | Weighted Average Cost of Capital - GROWTH RaTIOS - m easure the changes in the economic status of a firm over a period of time aia FORMULA SIGNIFICANCE neo avalatie Reflects the company’s 1. Basic Earnings _ Stockholders _ abilty to generate” ss ee Share commen shares income from normal erati i operations. fo omings ' ee Shows the relationship of r She earnings per share to the 2. Earnings Yield Piping market price per share. |4 PART 3 — FINANCIAL MANAGEMENT Cash Flow per Share Cash provided by Operations less Preferred ‘Common Shares Outstanding bividends__ An indicator of short- term capacity to make capital outlays and dividend payments. Dividend Payout Ratio Cash Dividends per Common Share Earnings per Share ‘Shows whether a firrn pays out most of its earnings in dividends or reinvests the earnings internally.- . Dividend Yield Cash Dividends per Common Share Market Price per Common Share Shows the relationship of common dividends per share to the market price of such shares. . Internal |. Ratio of Net Cash provided Measures the ability to Operating Cash by Operations pay dividends from lows to Cash Cash Dividends current operating Dividends sources. Measures the —Amount Retained _ Percentage increase in Growth Rate Asset Base assets kept in the 7 business. M he . Sustainable Return leasures t ; Equity Gr on Dividend relationship of pa rowth | common * ( 1- Payout the earnings Equity Ratio retained and . the return | thereon.chapter 13 ~ Financial stateme, Nts Analysis 705 g VALUATION Ratios — me d in the price of the feet’ Of shareholder value as reflecte 8 Stock -eS Rano ~_— a [>—————_] Fonmuta SIGNIFICANCE | we 1. Book Value per Measures the amount Share of net assets aan to the shareholders of a Outstanding given type of stock. Measures how high is 2. Market to Book Market Price the shares’ market Ratio or Price ——_per Share oe in lege t i B . '0 Book Ratio sok Nolue managed firms should sell at high multiples of their book value. Measures the relationship between 3. Price-Earings Market Price Se i "tanker cu. I e Ratio Earnings per Share| Growth companies are likely to have high PE ratio. Dividend Yield + Measures what 4, Return to Capital Gains shareholders actually Shareholders Measurement earn over a specified Period period of years. Reflects the market's valuation of new Market Value of investment. When the all Securities___| Qrratio is greater than 5. QRatio Replacement Cosi one (1.0), it means of Assets that the firm is earning retums greater than _ | the amount invested. fo =Smount invested. | Dividends per A Colca 6. Returnon ulation of the Shareholders’ Share + MV of return on the price of a Investment Reinvested Foca common share (ROS!) [_—_ Pree per Share706 CE LEVELS IG PR EFFECT OF CHANGIN! pte k wel ypener INFLATION — an increase in the ger ~¢ level seneral price leve DEFLATION — a clecrease in the gener I 4 he purchasing, power reel is inversely related lo the | val price level is © The general price of money F PRICE LEVEL PRICE INDICES USED IN THE CALCULATION O! CHANGES 1. CONSUMER PRICE INDEX (CPI) — mes asures price level by a monthly pricing of a specific set of goods/ser {by a typical es pure! urban consumer. 2. GROSS DOMESTIC PRODUCT PRICE INDEX (GDP DEFLATOR) => rapa the prices of all goods and services produced in a y. t includes investments, government purchases, exports, as well as consumer goods and services. 3. PRODUCER PRICE INDEX — measures the prices of ° specified commodities at the time of their first commercial sale. IMPACT OF INFLATION ON FINANCIAL MANAGEMENT 1. Higher rates of inflation lead to higher interest rates which in turn discourage investments. Inflation increases the demand for capital, 3. If the tax structure is not indexed for be pushed to higher not increased, 4. Inflatior 7 , fi; Ina Sa Profi because of inadequate valuation of fixed The accurac re) Prices of resources, thus increasing, the inflation, taxpayers may ax brackets even though real income has a ¥ of predictions neede, reduced during periods of rapid inf] 6. Inflation hurts creditors, fixed inc benefits debtors because the py eae epee savers ft valuable units of money, * Pay Pack ne ia for business planning is ation,chapter 13 - Financial stat, ements / Malysis, 707 > GROSS PROFIT VARIANCE ana, 4-WAY ANALYSIS LYSIS Sales Variances: Sales Price Factor: 200B Sales Less 2008 Sales ‘ et 2 BS Sales Volume Factor: jee 2" 2008 Sales at 200A sales price Be Less 200A Sales Cost Variances: Cost Price Factor: XX XK XK 2008 Cost of Sales xXx Less 200B Cost of Sales at 200A cost price XX xX Cost Volume Factor: - 200B Cost of Sales at 200A cost price xx Less 200A Cost of Sales XX XX KX Net Change in Gross Profit x The foregoing formula may be further simplified as follows: 4-Way ANALYSIS Sales Variance: Price factor , ‘ = difference in selling Pr ity Factor Volume or Quantity Fact ; = difference in units x 200A selling price ces x 200B units Cost Variance: ice factor ne difference in cost prices X 2008 units uantity Factor volume a units x 200A cost price = difference inpant 3~ FINANCIAL MANAGEMENT 708 data 5 nt actual ious yea Where: 2008 data rePreser ieeted, standard, previous Year or 200A data repr’ base year data 6-Way ANALYSIS Price factor , . = difference in selling prices x Volume or Quantity Factor : ; = difference in units x 200A selling price Price-Volume Factor ; , , = difference in selling prices x difference in units 200A units Price factor = difference in cost prices x 200A units Volume Factor = difference in units x 200A cost price Price-Volume Factor = difference in cost prices x difference in units 3-Way ANALYSIS Volume or Quantity Factor = difference in units x 200A 7 Price factor ~ = difference in selling pri con ee 8 Prices x 200B units Profit per unit = difference in cost Prices x 2008 unitsoS Analysis 709 GROSS PROFIT VARIANCE ANaLys I AVA ANALYSIS re S FOR TWo OR More PRODUCTS Sales Mix Variance: 2008 units @ x OOA sales pri l . S prices €ss 2008 units @ 200 Cost price. 2 Difference Prices in Less 2008 units i 0 Solos MtbcVartone’ @ 200A average gross profit per unit x x Final Sales Volume Variance: ‘00! i ‘ 200B units @ 2004 average gross profit per unit om Less 200A gross profit x Final Sales Volume Variance 4 CASH FLOW ANALYSIS ~ a detailed study of the net change in cash as a result of operating, investing, and financing activities during the period. THE STATEMENT OF CASH FLows — the basic financial statement prepared and used in analyzing cash flows. It reports the cash receipts, cash payments, and net changes in cash resulting from operating, investing, and financing activities of the firm during the period. CASH FLows — include cash and cash equivalents CASH EQUIVALENTS — Short-term, 1. readily convertible to known amounts of cash; and 2 n an 8 f ~ melatively insensitive to changes in interest rates, re CLASSIFICATION OF CASH FLOWS it ivitie: 1. Operating Activi ° revenues and expenses. relate to changes highly liquid investments that are: ear their maturity date that their market value is 5 — cash effects of transactions that create Operating activities generally 5 in current assvts and current liabilities.710 Examples: eases interest GG Pp goods/ services: interest income cale of etic a sale dividend income CASH INFLOWS: on loans, ceived a toe equity securities received on ment to suppliers; salaries and Wages mployees, taxes paid to the interest expense paid to { payments of other expenses Cash OuTFLows: = pay paid to e| government, creditors, and 2. Investing Activities - generally relate to changes in non-current assets. Examples: CASH INFLOWS: sale of property, plant, and equipment; sale of debt or equity securities of other firm; collection of principal on loans CasH OuTFLOWS: purchase of. property, plant, and equipment; purchase of debt or equity securities of other firm; lending of money to other firms 3. Financing Activities- _ relate to changes in long-term liabilities and stockholders’ equity accounts Examples: CASH INFLOWS: * - sale of company’s own stocks; issuance of bond or notes Cash OurFLows; Payment of dividends to stockholders, Tedemption of Jon, nan ig-term del pac n of capital stock m debt, reacquisitio SIGNIFICANT NON-CasH Activinies, These are not re * ported 7 Flows. However, in the body of the Statement of Cash these are repo, S a , “Ported as a Separate schedule at thechapter 13 —Financial Statements Anal 711 Analysis bottom of the Stat ement of C. supplementary . : ash Flows or ina separate note or chedule t ; 10 the financial statements. FORMAT OF THE STATEMENT OF Casi Flows NAME OF COMPANY Statement of Cash Flows Period Covered Cash flows from Operating activities: List of individual items XK Net cash provided (used) by operating activities XK Cash flows from investing activities: List of individual items ped Net cash provided (used) by investing activities xx Cash flows from financing activities: List of individual items xX Net cash provided (used) by financing activities Net increase (decrease) in cash Cash balance, beginning of period Cash balance, end of period Ke BE 3MULTIPLE CHOICE: ig, expressing all financial statement ‘al statements analyS'5, “ints is called 1. In financial S e of base Year a mmon-size analysis items as a percentag| c._ horizon . ies a. trend analysis. d,_ vertical common-size analysis, b. variance analysis. fi a i< expressing figures for a single 2. In financial statements ae oul on the financial statement year 05.8 Peis ain a balance sheet or sales in an income (for example, total asse' S statement) is calle c. horizontal common-size analysis, a. trend analysis. : i n-size analysis, b, variance analysis. d._ vertical commo ¥ . i i ct? 3. Which of the following statements is corre ; ome a. Liquidity refers to the firm’s ability to pay all its obligations and to continue operations. a b. Solvency refers to a firm's ability to survive in the long-term by paying its short-term obligations. c. Trading on the equity refers to a firm’s sale of its own stocks in the stock exchange. d. Ratio analysis addresses such issues as the firm’s liquidity, use of leverage, management of assets, cost control, growth, and valuation. 4. Solvency is a firm's ability to survive j <—- long-term obligations. Hu key foci 7 the long-term by paying its earning power. Capital structure consist Saretcap heal Stctite ahd a. the capital stocks of the firm, sts of * the ie total assets, * the firm’s sources of financi d term, of its assets, "ancing, whether long-term or short- . thes a tockholders equity accounts, 5. Financial levera, i 9€ or trading o} ity i a. all of the cor, “19 ON equity is advan been i Poration’s authorized capi tageous when Issued, capital stocks have already with its deposi bank. ‘unds Pository ank. ial distress, exceed borrowing costs._ flo g. Through financial state, managers, investors, zy MIS analysis, interested parties - such as financial strengths and weap et"©"S ~ can identify the company’s except akNesses and know about the following, a. profitability of the busi : b. the firm's ability to mono c. safety of the investment its obligations. d. composition of Mell in the business. igement running the firm. , Financial statemen; is j 2 imitations: Among a ee iS not without problems and a. A ratio that is aon Sie is as follows, except: acceptable to anothe, p 2 le to one company may not be b. There may be som i en some other factors are considered. and estinst le differences in the accounting methods | mates used by companies so that comparison of their ratios may not be advisable. Financial statements are based on current market value of the firm 's assets, therefore they do not reflect historical costs. d. The timing of transactions and use of averages in applying the various techniques ‘in financial statements analysis affect the results to be obtained. c . Which of the following is not a limitation of ratio analysis affecting comparability among firms? a. Provision of useful information regarding the efficiency of operations and the stability of financial conditions b. Different sources of information c. Different accounting periods d. Different accounting policies financial health of a firm, financial analysts use . In assessing the n ; rent 2 One technique is the vertical, common-size different techniques. ia ai is, an example of which is : z ‘al aoe assets is 20% of the total assets as of a certain b ea current assets as of a certain date is 20% greater ith the previous year. / C the | el als fventory turnover is twelve times during d ae Yrovided by operations is 100,000.part 3~ 0 IE m tements analysis jal state! is, t finaneme indices are used, es a 10. Price level chang’ ' fernges, 5 es are se ame price es ig the Gross Domestic P (GDP) Price ample of 5 earl GppP deflator, which : price level a. measures goods and services P! b,_ includes the prices ol country. ; c. measures the price a specifi their first commercial sale. vo / y one organizational unit for the is the amount charged b “uni transfer of goods or services to another organizational unit within the same firm. a monthly pricing of a specified set re urchased by a typical urban consumer, fall good!s and services produced in the ied commodities at the time of d. g statements is not correct? A limitation of 11, Which of the followin: Ee ik bility from one interim period to ratio analysis affecting comparal the next within a firm is that a. in a seasonal business, inv widely with year-end balances not for the period. b. management has less incentive to window dress financial statements to improve results. c. comparability is impaired if different firms use different 4 accounting policies. , |. misleading conclusions if it is are selected. may result if improper comparisons entory and receivables may vary reflecting the averages 12. The varia is ton tetanus tbs seas sold is called a. sales volume varian I Ice, b. sales price variance, a ee i ee . variance. 13, . For a multi-product company, 1 a. : the = te Sales mix variance an sales volume can be divided into the B sees mix variance and Eeeuton Volume variance. sales price var quantity vari d. sales volume ee and sales valine waite ‘ariance and sales quantity variance13 — Fini 4 ancial Sti chapte ‘atement: S Anal isis, 715 44. The statement of cash flow: a. reports the revenue. : ‘ enue: firm during the pea and expenses incurred by the b. shows the com Ff pany’s and non-current asset ASets broken clown into current shows the ci 4 reports the Ree capital structure for a period of time. investing, and fina nange in cash resulting from operating, fancing activities of the firm during the period. ao 45. In cash flow analysis, i. are the oe ed cash flows from operating activities iach cts of transactions that create revenues and >. ci relate to changes in non-current assets. 4 rally relate to changes in long-term liabilities and stockholders’ equity accounts. d. are irrelevant. 16. In computing a ratio, when a balance Sheet amount is related to an income statement amount, a. the income statement amount should be converted to an average for the year. b. the balance sheet amount should be converted to an average for the year. c. both amounts should d. the amounts may be ust be converted to an average for the year. ‘ed as is to develop a meaningful ratio. 17.. Which of the following statements is incorrect? ; a. The ratio of sales to working capital is measure of liquidity ind activity. : ; b, The ee of days’ sales in receivables is a measure of quid well as of activity. ae | ratio would indicate that the teal . Ahigh gales-to-working capi J . aan not susceptible to liquidity problems. d, The earnings per share is a profitability ratio. are taken from the balance sheet of Juls Company 1 in 8. The following 31, 2008: as of December716 i 41,600 Current and and in banks 30°00 eeounts receivable 308,400 —P 850,009 Merchandise invent Liabilities: cep ja Current liabilities: 280,800 Notes payable _ 781,200 1,062,509 3,000,000 Accounts payable Long term liabilities tio and quick (acid test) ratio? What are the company’s current ratio ( Current Ratio Quick (Acid Test) Ratio 0.51 a. 0.80 b. 0.51 0.80 C 0.21 1.93 d. 3.03 0.32 19, The following data were taken from the comparative balance sheets of Dolms Company: Dec. 31, 200B Dec. 31, 2004 Cash : P 35,000 . P 33,125 Marketable securities 16,375 15,125 oe and accounts receivable, net 49,375 48,000 inventories 71,250 69,375 asia expenses 2. 375 5,000 lotes and ; 7 josued toe payable (short-term) 31,250 35,625 Bonds payable, due 200M soc cee f , The company’s workit ital i to 2008 by Ing capital increased (decreased) from 200A a. P135,625, b. P124'500. i one . /125. ITEMS 20 to 25 '0 25 ARE BASED ON THE FOLLOWING INFORMATION: Following are select financi: ed financial ; inancial statements of Antiporda one data taken from the ration:chapter 13 ~Financial state, ents Anal ysis 717 Cash As of December 31 Notes and acco) a 2008 UNS Fecan Merchandise inventory Nee net P dotugn F 1 Sao Marketable ~ iandiand eu ~ short-term 720,000 1,200,000 Bonds payab ings (net) 240,000 80,000 Recounts le — long-term 2,720,000 2,880,000 Payable ~ trade 2,160,000 2,240,000 Rae pree rn nnn For the Year Ended December 31 Sales (20% cash, 80% 2008 200A credit sales) r P18,400,000 P19,200,000 Cost of i 500; goods sold 8,000,000 ‘11,200,000 Compute the following ratios: 20. Current ratio as of December 31, 200B: a. 0.5:1 C 1 b. 2,0: a. 21. Quick (acid test) ratio es of December 31, 200B: a. 2.0tol c. 1tol b. 0.5tol d. 0.7 tol 22. Accounts receivable turnover for 200B: - a. 23.0 times c. 36.8 times b. 18.4 times d, 4.6 times 23, Merchandise inventory turnover oO — a. 13.33 time® d. 8.33 times b. 11.10 times i 100A: 24, The gross margin rate lis 58.33% d. 56.52% 41.67% b, 71.43%ee PAR! 900" 718 200B (use 360 days): 25. The average age of accounts re “ day " ): a. 19.57 days d. 18.40 days b, 19.57 months ceivable c 0 ation pertains to Batalla Company for 200B; The following inform 316,000 : a ery at December 31, oe ered os Purchases of merchandise, all 0 pe Cost of goods sold The company’s merchandise inventory turnover for 200B was a. 4.0 months. c. 4.0 times. d. 3.60 months. b. 10.0 times. 27. The following information pertains to Cenon Company for 200B: Accounts receivable, January 1, 200B P8,000 Accounts receivable, December 31, 200B 9,600 Net cash sales 24°43,200 Accounts receivable turnover for 200B 5 times The company’s net sales for 200B was a. P47,200. + GAPS; 200. b. P88,000. d. P48,000. 28. Super Hot Pan de Sal and Flami i each other in the hot pan de Sal er ee cules ee e market. Super’s strategy is to amit ee customer orders rather than for iaventory. order, then sells froin ica Depa sal vel ig there ts 00 wa Entory so that customers do not have to infor statements is given begat from a recent year's financial Sales Super Flamin Cost of goods sold P729,720 p1246,760 ventory, beginning 565,480 959,200 Aventory, ending 9,320 62,800 3 10,920 Which compan ; 80,200 times? (Round se thE higher invento, Your answer to one digi ry-turnover and by how many itafter the decimal place)ae eo hanes ITEMS 2910 31 ARE BASED Oy 29, 30. 31. 32. tatements y Malysis i ? a. Super, 55.9 time: > Paming, 13.4 times © Super, 42.5 times " d. Flaming, 42.5 times i THE TOL IGIN| TION: Following are some A -LOWING INFORMATION: Corporation: ta from the financial records of Dave Sales 200B 200A PS00,000 P375,000 Common stock Retained earnings 128,000 Dividend payout ratio 40% 405,000 After tax profit ‘4% of sales Cash : 12% of sales Accounts receivable 18% of sales Inventory : 30% of sales Fixed assets, net 40% of sales Accounts payable 20% of sales Accruals : 5% of sales How much is the retained earnings balance as of the end of 2008? a. P120,000 c, P105,000 b. P117,000 d. P125,000 How much is the company’s total assets as of the end of 200B? a. P500,000 c. P242,000 b. P375,000 d. P742,000 cf fe -term debt as of the end of 2008? How much was the company’s long ©. 375,000 oo d, P133,000 b, P125,000 Lim Company's return on common For ste year rane 12.5%. Its average stockholders’ equity ee ood was P500,000, inclusive of P50,000 par value ri s Ene oh the tock with a dividend rate of 8 Yo. of pret '¢ net income for 200B? ingani> c. 58,500 ch was the co! HOW ee d. P62,500 a. 60,250NT 720 Siason Company’, i atios 33. The following ie for 2008: 54% i S financial statemen 2 " Return on asse 1.6 times Asset turnover ratio? Yo i in What was the company $ profit te es oe d. 24% . 6% ken from Ethaniel Company's financia| years 200B and 200A: 200B 200A 900,000 P750,000 125,000 225,000 225,000 600,000 550,000 are ta 34. The following figures lendar statements for the cal Total assets Long-term debt (12% interest rate) 8% Preferred stocks, P100 par value Total stockholders’ equity Net income (after tax of 30%) 70,000 What is the return on average total assets? a. 9.8% c. 12.95% b. 10.5% d, 14.9% 35. Last year, a business had no long-term investments; this year, long- term investments amount to P500,000. In a horizontal analysis, the change in long-term investments should be expressed as 7 a abeoli a of P500,000 and an increase of 100%. pervert value of P500,000 and an increase of 1,000 c. an absolute val cane lue of P500,000 and no value for a percentage d. no change i In any terms ; | the previous year. because there was no investment in 36. i Earnings per share amounts to P10 and t 5. Ifthe dividend yield is 8% he price earnings ratio is z z 2 z 3 8 2chapter 13 ~ Financia} Statement S Analysi s 37. The following 721 stateme rma nts of Dianice non Was taken f . Current liabititi lustries: rom last year’s financial Long-term iat, ™ liabil Preferred stanltes P 60,000 Number 0 180,000 F cor | ™MMon shares Outstanding ion , The company Y has a debts year. What was the (pot to-equiy ratio of 0.96 to 1 at the end of last a. P13.75 Value per share at the end of last year? b. P20.00 S 25.00 |. P49,00 ITEMS 38 and 3: 9 ARE BASED ON THE FOLLOWING INFORMATION: Net sales, P1.8M; expenses, P315 me rai of goods sold, P1.08M; Operating Net income P195 00 -arnings before interest and tax, P405,000; assets, Pim, C 000; Total stockholders’ equity, P0.75M; Total a ; Cash flow from operating activities, P25,000. 38. The return on investment is a. 22.5%, - c. 19.5%. b. 26.5%. 4. 405%. 39. The cash flow margin is a. 14%. c. 10.8%. b. 2.5%. d, 12.8%. assets of P200,000, including inventory 40. If a company has current ratio of 2:1, what is the value of the of P80,000 and a quick company’s current liabilities? a. P100,000 c. 240,000 b. P140,000 d, P 60,000 BASED ON THE FOLLOWING INFORMATION: ITEMS 41 and 42 ARE wing data about a company: Consider the follow 3.5to1 Current ratio 3.0 tol Acid-test ratio P150,000 Te ities at yearend : curren ed ning of the year re 1 ao turnover — Inventory-Fineee NE part 3 722 ve inventory at the end of the 'S is the value of the company . ra . c 150,000 2 pve d, P525,0 b. P125,000 he Id during the year? 'g cost of goods sO! 42, How much is the company’s ¢ i of 000 2 F500 000 gd. P 800,000 1600, | i THE FOLLOWING INFORMATION: ITEMS 43 to 45 ARE BASED ON Presented below are the compra of DM Atienza Company for the calen DM ATIENZA COMPANY : Statements of Financial Position Statements of Financial Position far years 200B and 200A: December 31 IN THOUSANDS ASSETS 2 re aah a ae P 240° P 200 Marketable securities 160 aoe Accounts receivable (net) 360 240 Inventories 480 00 Other current assets 220. 7160 Total current assets P1,360 — P1,120 Non-current assets: Investment in securities P 200 P 160 Property, plant, and equipment, net 2,000 2,120 Other non-current assets, net "440 ‘240 Total non-current assets ‘2,640 2,520 Total assets 4.000 3.640 LIABILITIES AND EQUITY Liabilities; i Current liabilities Non-current liabilities 2 680,88 Total liabilities 200 __200chapter 13 ~ Finacial 54 44. 45. 46. tatements Analysis 723 Equity: 5% Cu i 0 Prenat NON-participat B eterred Stock, P10 pr Vallg a Shares issi nd outst Common stock, P10 par and outstanding Pp 00 P 800 160,000 shares 120,000 shares ieerof v ares is x ‘ APIC ~ Common 'ssued and outstanding 1,200 1,200 Retained earnings 600 600 Total equity 520 __400 Total liabilities and equity P3,120 23,000 P4000 3,64 Based on the giver i inanci a. current fate fer sage seer bestioneins -_ b. current ratio for 200A was 2.00 to 1. €. acid test (quick ratio) for 2008 was 1.12 to 1 d. acid test (quick ratio) for 200A was 1.72 to L Assume that for 200B, net credit sales was P2,400,000 and the gross profit was 26.67%. What was the company’s accounts receivable turnover for the year? a. 8 times c. 6.67% b. 8% d. 10 times mpany’s net income for 200B was P280,000 Assume that the co: andthere were no preferred stocks dividends in arrears, what was ity for such year? the company’s return on common equi a. 12.39% c. 10.62% b. 7.84% d. 8.00% as of the end of 200B are as C. Atienza Company's equity balances follows: a . 6% Cumulative, fully participating ‘h 100 par vatue, WI preferred stocks, P2' ) liquidation value of pee P ana pas p40 par value , Common stocks, Pp: ae Retained earnings No dividends were declared during the year.724 x value per share of common stock is ok Vi Cc. C. Atienza Company's bo p91.20. a. P111.20. d. 89.20. b. P88.00. had total assets of P375,009 mpany tal 47. As of the end of zon te its budget for capital investment and equity of P2002 finance a portion of the capital budget, the projects is P62,500. from a bank which set a condition that the company may borrow the 200C’s debt-to-equity ided that ‘ould be approved, provided , IC's see should be fe some as the debt-to-equity ratio in 200B. How much debt should be incurred to satisfy the bank's condition? a. P28,125 c. P34,375 b. P62,500 d. P51,138 48. During the year, Tindugan Company earned net income of P60,000. For next year, it has a capital budget of P80,000. If the company’s plowback ratio is 30%, how much external funding is needed for the capital investment project? a. P80,000 c. P56,000 b. P62,000 d. _ P98,000 ITEMS 49 to 55 ARE BASED ON THE FOLLOWING INFORMATION: The following data show actual figures for selected accounts of Liezel Corporation for the calendar year 200A and selected budget figures for 200B. The company’s accounting manager is in. the process of reviewing the 200B budget and calculating some ratios which he thinks are relevant in the review: Budgeted Actual Current assets: Dec. 31, 2008 Dec. 31, 200A Cash icersrenmin Saat wentory y 56, Other current assets 56,000 64,000 ia Current assets page 16,000 lon-current assets 168,000 144,000 Total assets ~220,000 204,000 348,000chapter 13 49. 50. 51, 52, ~Finan ial Statements a alysis Caetfaiies 725 a relies P onan ee ee ‘gm nf (Ock (P; sou _24,000 Retained camingc Parvaluey — paait00 P_92,000 Total equity 0,000 240,000 Total liabilities ang — 25,600 __ 16,000 Ind equity 265,600 256,000 388,000 —_p348,000 Bul IDGETED. INCOME STATEMENT For the he Year Ended December 31, 200B Sales (all on credit) Cost of goods sold P280,000 Gross income 128,000 Administrative expenses P1s2,000 Operating income 23.600 Interest expense P3609 Income before tax at Income tax (40%) , oD Net income eon . P_57,600 How much dividends does the company plan to pay in 2008? a. P48,000 c. P32,000 / b. P 9,600 d. P57,600 For the year 200B, the company expects to have a(an) a. debt-to-total assets ratio of 68.45%. b. accounts receivable turnover of 3.5 times. c. inventory turnover of 2.29 times. d. total assets turnover of 0.76. The expected return on assets in 200B is a. 15.65%. c. 14.84%. d. 7.83%. b. 16.55%. pects to collect its receivables On the average,’ the company &X! during 2008 in (use 360 days) — b. oe Says. 4, 78.83 days.726 ntory in 200B is (use 369 company’s we f the 53, The average ag¢ © 169 dey. ? onths. a ” 171.36 days. d. 6M ee — | company can earn interest i the ber of times The expected num! ; 7 expense in 2008 is c 63 times. a. 24 times. d. 41 times. | b. 40 times. os i is ‘ ings per share (EPS) i 55, For 2008, the company's earning y P84, 2 a d. P15.20. b. P9.60. The following selected data were taken from Magallado Company's 56. . aa . dar year 200B: a satement for the calendar y‘ 334,000 Gross income 103,600 Interest expense 4,000 Income tax : 9,600 Net income o 30,000 Gain on sale of a business segment, net of tax 16,800 ‘The number of times interest was earned in 200B was a. 7.70 times. Cc. .6.9 times, b. 0.57 time. d. 3.50 times. 57. Last year’s asset turnover of Johvic Company was 3.0. This year, the company’s sales increased by 25% and aver total assets ecreased by 5%, What is this y Satie ee ©ar’s asset turnover? b. 3.6 de a 58, Following are sele . cted ae data taken from the records of Jemson Income before tax ( frome tax rate 200,000 ene Payout ratio we eI Of common shares Outstanding 10 ae 1,000 shareschapter 13 = Financial Stat i ‘ements Analysis 727 How much divide; the year? Nds per share was paid by the company during a. P9.60 b. P6.40 e116) d. PAS 59. In 200A, Sweet Com dividends. In 2008 dividends decreased payout ratio in 200B? a. 62.50% 9 b. 56.25% da78% Pany paid out 50% of its earnings in , its earnings decreased by 20% and its by 10%, What is the company’s dividend 60. What is the company's dividend yield on common stock if its asset turnover (ATO) is 0.9, payout ratio (POR) is 0.60, and price earnings ratio (PE Ratio) is 12? a 7.2% c . 5% b. 10.8% d. 7.5% 61. At the end of 200A, Gabbuat Company's total assets was P500,000. In 200B, it earned net income of P30,000 and paid dividends of P10,000. What is the company’s internal growth rate? a 1% c 5% b. 4% d. 9% ITEMS 62 and 63 ARE BASED ON THE FOLLOWING INFORMATION: 5 of P'300,000 in 200A and the price ny had sale: Manaloto Company ted to increase from 300 in 200A to index for its industry is expe 320 in 200B. 62. If sales in 200B is exectly 320,000, it means that the company realized 6.67% real growth rowth rate. c. a 6.67% gl rate. Be 3 a ee rot rate. d. anegative growth rate, 63. H h should the 200B sales be in order to achieve a real . How muc growth rate of 30%? c. P390,000 a paig.ore gd. P320,000 b. P365,728 0 in 200A when the price 300,00 ; : d sales of “7 200B, the price level index wan Company ha 320. in 2008, OF eel nde oF ts industry 50, What is the level of sales that is expected deer reach in 2008 in order to achieve a rea| Jumawan Compa growth rate of 30% c. P390,000 D Peesed5 * g, p320,000 65, The following data were taken from the financial statements of * Macarambon Company for 200B: Total assets p500,000 Current liabilities 100,000 Long-term liabilities 150,000 Stockholders’ equity 250,000 Operating income after taxes 70,000 If the company’s weighted-average cost of capital is 10%, what is its economic value added (EVA)? a. P45,000 c. P30,000 b, P35,000 d. —P20,000 66. In 200B, Matanguihan Company earned an. after-tax operatini income of P400,000. As of the end of that year, it had ei eauly capital of 1,600,000, with an after-tax weighted-average cost of capital of 15%, - Its liabilities are composed solely of short-term, rest bearing notes and accounts Payable amounting to P80,000. What is the Matanguihan C i net te ompany’s economic value added (EVA)? b. -Pico‘ooy cP 60,000 4. P240,000 ITEMS 67 to 73 . ARE BASED ON THE FOLLOWING INFORMATION: Sta. Maria Company jade i Produces an, Tht lees rae when actvated nee phone blaster, 4 them or is taken by tn Owners when their remote commander. actual results of operat Heves. The static m; Unit is snatched from ‘ons for the month of Tune budget and the are as follows:13 Financial Stal chapter itements, AY nalysis 729 Sales (8,000 unit Budget " uni . tual Cost of goods sold its) P800,000 (9,600 units) p1/056,000 Gross profit 480,000 "556,800 320,000 Management want: variance of P179,200 oan of the favorable gross profit budgeted gross profit of 320,000, pon oF ae 67, What is the sales price variance? a. P 96,000 fi b. P160/000 ee c. P19,200 favorable . e d. P96,000 unfavorable 68. What is the sales volume variance? a. P 96,000 favorable c. P19,200 favorable b. P160,000 favorable d. P96,000 unfavorable 69. What is the cost price variance? a. P 96,000 favorable c. P19,200 favorable b. P160,000 favorable d. 96,000 unfavorable 70. What is the cost volume variance? a. P 96,000 favorable - G b. P160,000 favorable d P19,200 favorable P96,000 unfavorable 71. What is the percentage change in sales _ 9 2 c fo increa' a. 20% decreas d. 10% increase b. 3.33% decrease i hange in volume? a tt i perce - c. 20% increase b. ao orecrease d. 10% increase . 3.33% e in cost price? pS ee ge crane c. 20% increase » 20% | 10% increase b. 3.33% decrease d” OWING INFORMATION: ASED ON THE FOLL r] 74.10 80 ARE P. ITEMS 74 to aie Corpor ation asks you to prepare ap sed on their Comparative The management of sey! mt ariance analysis of the gross Pr and 201 Bt income statements for 20 100 200A Variance 990,000 pg00,000 P190,000 F aa 760,000 640,000 120,000 y Cost of goods sold Lb b fl 550 noo F Gross profit nto you is that volume increased The only known information give from 200A to 2008 by 10%. 74, The-sales volume variance is a. P80,000 favorable. b. P56,000 unfavorable. c. P110,000 favorable. d. P-64,000 unfavorable. 75. The sales price variance is a. P80,000 favorable. c. 110,000 favorable. b. P56,000 unfavorable. d. P 64,000 unfavorable. 76. The percentage change in sales price is a. 12.5% increase, c. 10% increase. b. 12.5% decrease. d, 10% decrease. 77. The cost volume variance is a. P80,000 favorable. c. P110,000 fe : i favorable. b. P56,000 unfavorable, d. P 64,000 unfavorable. 78. The cost price variance is a. PB 5 peng aereble. c. P110,000 favorable. 000 unfavorable, d. P 64,000 unfavorable. 79. The percentage change in cost Price is 2 7.95% increase, c % ii » 7.95% decrease, d. ee drcace - 12.5% decrease. 80. The variance in 9FOss profit due b. pao favorable, ne grange in volume is ,000 unfavorable, . hae favorable i p ‘avorable.chapter 13 -Finarcial st ITEMS ST to 84 ARE Basryy ON oo N 83. 84. ITEMS 85 to 91 ARE BASED atements Analysis 731 THE ING | The income data of FOLLOWING INFORMATION: Escafi are as follows: Scaito Company for the years 2008 and 200A Sales Pi 2006 200A Variance Cost of sales 276,000 204,000 —-P72,000 F Gross profit 151,800 122,400 _29,400 U Pi24.20) Pp 81,600 — p42,600 F If the sales price in 2003 is a price in 200A, the P72,030 in Pproximately 20% higher than the sales ‘ ‘ crease ir: sales may be analyzed into: ales Price Variance. Sales Volume Variance a. P46,000 favorable P26,000 unfavorable’ b. 46,000 unfavorable 26,000 favorable c 26,000 favorable 46,000 favorable d. 46,000 favorable 26,000 favorable The number of units increased (decreased) by a. (12.745%). c. 20%, b. 12.745%. . d. (20%). The P29,400 increase in cost of sales may be analyzed into: Cost Volume Variance Cost Price Variance a. 15,600 favorable P13,800 unfavorable b. 15,600 unfavorable 13,800 unfavorable c 13,800 unfavorable 15,600 unfavorable d. 13,800 favorable 5,600 unfavorable The 2008 cost price is higher (lower) than the 200A cost price by 7 )o/ a. (12.745%). c ts b. 12.745%. d. (10%). ON THE FOLLOWING INFORMATION: ee consumer products. Sales and thr ne. sells he three products are as follows: Traders, I : Amoroso * vertaining to tl other information pepanT 3 - FINANCIAL MANAGEMepy) 732 f Sales Gross Prof 2008 unis a eo 6Gb P2,400 Product TIC on 12,800 thee pou TAC 500 | 2,400 «= 4,800 _600 Toc 2°) 597200 22.600 P4,600 200A P14,400 —P4,800 P19,200 1 Produet TIC a 14400 12,000 2,400 1,600 1,280 __320 TOC Feo 35200 © Paz680 © BLS20 ‘oss profit variance amounts to * me 2.900 favorable. c. P 8,000 unfavorable. b. P2,920 unfavorable. d. P12,120 favorable. 86. The sales price variance is a. P8,000 unfavorable. c. P3,600 favorable. b. 4,400 unfavorable. d. P3,600 unfavorable. 87. The sales volume variance is a. P4,400 unfavorable. Cc. P8,000 unfavorable. b. P4,400 favorable. d. P3,600 unfavorable. 88. The cost price variance is 7 ae favorable. - P5,080 favorable. » P1,800 unfavorable. d. P3,280 unfavorable. 89. The cost volume Variance is a. P1,800 favorable. S . + “3,21 b. P3,280 unfavorabie, d. P5080 oe ‘ . 90. The net ross profit vol i Lime variance amounts ‘o a p7aa0 inravorable, c. P1,120 thea Cie nfavorable, d. P1,120 favorable. 91.chapter 13 ~ Financial Statemeny Mts Anal ysis 92. 93. 94. 95. 733 beg Mix Variance 436 u favor arable P684 unfavorable . Worable S60 unfavorable 684 favorable unfavorg 560 unfavorable able 160 unfavorable Final Sales Volume Variance aoocm Aquino Compan c Y use: cash provided by oan was P105,600, its Son inventory increased by p4 3 ee method in determining the net ine Wvities. During the year, its net income 00 Payable decreased by P8,000, its by P9,600. -How much is the m and its accounts receivable decreased a. P102,400 net - ove by operations? b. P108,800 d. P 83,200 . , Bet i eee uses the direct method in determining the net pI led by operating activities. During the year, operating expenses was P208,000,prepaid expenses increased by P16,000, and accrued expenses payable increased by P24,000. Cash payments for operating activities amounted to a. P208,000. c. P200,000. b. P224,000. _d. P216,000. rr 200B, Macarambon Company's income statement For the yea shows operating expenses of P204,800. The following information is also available: Prepaid expenses, January 1, 2008 P12,000 Accrued expenses payable, January 1, 200B 32.600 i 200B Prepaid expenses, December 31, pecrued expenses payable, December 31,2008 28,000 h paid for operating expenses? ch was the cash P Pe Oa aol How mut a, 204,800 d. P215,200 b. P194,400 . ny’s land account decreased by P600,000 In 2008, Rov! compat for the same amount. Its equipment aa 5 a result of a cash purchase, and because of 2 © ‘ account increase by aes its bonds payable incre cash at face yalue- pga0,000 due to an issuance forpant 3~ FINANCIAL MANAGE ye) a “+ activities |S cash provided by investing "p> 840,00 mem 360 00. d._P1,360,000. b. 600,000. WING INFORMATION, - 1 FOLLO ITEMS 96.t0 99 ARE BASED ON TH) paring the company’s Statement ° 1 int is prel i Tan Company's aoa elected information a may be helpfy Flows for th is follows: of Cash Flows f of the statement Is as 200A Increase (Decrease) in the preparation OF NT) 31, 2008 Dec. Il, : 7 0,400 P43,360 53,760 P20, ee fect receivable Be on a Gen Inventories eo 40080 tent Accounts payable From the 200B income statement: Sales P526,640 Operating expenses 464,000 Income before tax P 62,640 Income tax __ 28,240 Net income P_ 34.400 Other information: « — Included in the operating expenses are: > loss of P1,920 resulting from the sale of an equipment for P21,600 cash. * Depreciation expense of P70,400 * The company purchased machinery for P60,000 cash during the year, ‘ * The income tax show full during the year, * During tl meme year, the company declared and paid dividends of N on the income statement was paid in 96. If the indirect method j overt rene lod is used, how Much is cash provided bY a. (P97,760) b. 97,760 © (738,960) 840chapter 13 ~Financi 97. 98. 100. al State, MENS Analysis 735 If the direct meth ; hod is, operating activities> |” U4: how much is net cash provided by a. (P97,760 b. 97/760) c. (P28,960) d. P95,840 How much is the ne a. P81,600 1 Net cash flows fem ivestng activities? (F21,600) 4. (P38,400) How much is the net cash flow from financing activities? a. (P16,000) " c. P38,400 b. P16,000 d. (P38,400) Which of the following statements about the Statement of Cash Flows is incorrect? a. It provides information about the operating , investing, and financing activities during the period. b. It is one of the basic financial statements. c. It provides information about cash receipts and cash payments of a firm during a period. d. It reconciles the ending cash account balance per books to the balance per the bank statement.CHAPTER 8 FINANCIAL PLANNING AND ° BUDGETSGEMENT ACCOUNTING part 2- MANA n i erms, for a _ntitative terms, a 1 xpressed in quant Feith express BUDGET — a realistic plan certain future period of time. ADVANTAGES OF BUDGETING oe comaganieateite geme used by top ma O the organiza about and n. 1. Budgets can be ; plan for the future, plans and goals throughout 2. Budgets force management to think ately allocated 4. 8 sh budgeting, resources are More apP P ne £ Thrwegh tmdgeting potential bottlenecks can be «is . Throug) a before they occur. Budgeting promotes coors organization. . a 6. The goals and objectives identified in the budgeting, process can serve as benchmarks or standards for evaluating performance. dination of the activities ol the entire wr BUDGET COMMITTEE - composed of key management persons who are responsible for overall policy ‘matters relating to the budget program and for coordinating the preparation of the budget itself MASTER BUDGET — encompasses the or: financial plans for a certain future period is composed of the operating budge! ganization’s operating and of time (budget period). It t and financial bud get. An overview of the Master Bud t i a . 2 various budgets and schedules ios ie interrelationship: 6 OF ats es a typical S ore presented on page 375. The computations Gran eee firm is ‘a's are as follows:geTeD PRODUCTION: BUDGETED MATERIALS PURCHASES pudgeted sales xx Budgeted production i | ug gesied ending finished x Quantity of materials required \ goods inventery x per unit of product Ps Tota! xx | Total materials to be used x Less expected beginning Add desired ending finished goods inventory xx materials inventory Es pudgeted production XX Total mm | : Less expected beginning \ materials inventory % Budgeted materials purchases x | | Bu Cass BuOGEr: Budgeted sales xX Cash balance, beginning vs add desired ending Add receipts mw merchandise inventory xX Total cash available before | Total . current financing x | Less expected beginning Less disbursements a merchandise inventory x Excess (deficiency) of cash available | Budgeted merchandise over disbursements purchases x Financing Cash balance, ending Peel poe Le TYPES OF BUDGETS AND OTHER BUDGETING CONCEPTS 1. The MASTER BUDGET and its different components. 2. CONTINUOUS (ROLLING) BUDGET — a budget that is revised ona regular (continuous) basis. For example, a budget for 12 months is extended for another month in accordance with new data as the current month ends. 3. FIXED BUDGET - a budget based on only one level of activity (sales or production volume) . 4, FLEXIBLE BUDGET — a series of budgets prepared for many levels of activity. It makes possible the adjustment of the budget to the actual level of activity before comparing the budget figures with the actual results. .AGEMENT ACLOMNTING 376 ocess wherein the 10, sting P pudgetin& . NG - 4 aed eri js simply adju! ing period. ciget is prepared every period (1B) - a aie must be justified regardless expenc periods. allow for changes INCREMENTAL BU current period’s planned for the com ZERO-BASED BUDGETING ( from a base of zero: All ex of variances from previow a pean ’s re’ UFE-CYCLE BUDEET a ove (rom research and development i ver its entre life ¢ i is helpful i estimated over its entire 1! ). This concept is helpful in to withdrawal of customer support). 1s for, and emphasizes icing. It account t costing and target pricing. , then relationships among the costs at all stages of the eo such as research and development, design, production, marketing, distribution, and customer service. ACTIVITY-BASED BUDGETING — unlike in the traditional emphasis on functions or spending categories, activity-based budgeting applies the ABC principles and procedures to budgeting. > the activities are identified, a cost pool is established for each activity, a cost driver is identified for each pool, and the budgeted cost for each pool is determined by multiplying the budgeted demand for the activity b i suit ofeuchactirty ty by the estimated cost per kaa = Kien: itipedvement on aps 'sa Japanese term that Means continuous improvement of sities pudgeting assumes the continuous and the costs of their implomay? eo Me effects of j of their implementation aro esti ects of improvement * estimated, 8 is based not » z to be made n the existing system but on GOVERNMENTAL BUDGET ~ governmental budget performance evaluati a form of control havi > Kaizen budgetin, changes that are i ike in a prj tis not on} ' 4 Private-sect On but algo ga MEH lan ancl a bate for MB the force of ge 8" Of public policy andchapter puDGET MANUAL ~ describes how a budget is to be prepared. usuall) 1 BUDGET REPORT — shows a comp performance. The budget variances, 377 g~ Financial Planning and Budgets Tt ly includes: BUDGET PLANNING CALENDAR — the schedule of activities for the development and adoption of the budget. It includes a list of dates indicating when specific information is to be provided by/to those who are involved in the budgeting process. pet schedules, so that those paration would know to hedule is to be DISTRIBUTION INSTRUCTIONS for all budg segments involved in the budget pre whom/from whom a computed budget sc given/ acquired. arison of the actual and budget which are properly described as either favorable or unfavorable, are also shown on the report.378 OVERVIEW OF For A Typica OPERATING BUDGET ENDING INVENTORY BUDGE! 35, Materials, Wostein-Process) HE rThonufacturil MATERIALS cost FACTORY (OVFRHFAD COST mee caPTaL EXPENDTURES |——> Bunt casi Buocer |S BUDGETED INCOME STATEMENT R&DIDESIGN COSTS RUNGFT MARKETING COSTS BUDGET DISTRIBUTION COSTS RUNGFT CUSTOMER SFRVICF COSTS ADMINISTRATIVE COSTS BUNGETpapter 8— Financial Planning and Budgets Ee uLTIPLE CHOICE: 1. Budgeting is a d translating goals the process of creating a formal plan ant into a quantitative format. b. a technique for comparing actual costs with standard costs. ff manufactured c. a technique for determining the cost ol products. d. a means of product costing that emphasizes activities as basic cost objects. 2. Which of the following statements is correct? a. Budgetscensure goal congruence between superior: subordinates. « b. Budgets _ define» responsibility centers and promote communication and coordination among organization segments. c. Budgets foster the: planning of operations and facilitate the fixing of blame for missed budget predictions. d. Budgets foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments. sand 3, Budgets are related to the following management functions, except a. planning.” c. performance evaluation. b. control. ~ d.) None of the above 4, It involves the forecasting of realizable results over a definite period or periods, the planning and coordination of the various operations and functions of the business to attain realizable results, and control of variations from the approved plan. a. Cost control c. Internal control b. Budgeting d. Vouching 5. Which of the following statements regarding budgeting is incorrect? a. Planning and control are the essential features’ of the 2 budgeting process. b. Capital expenditures budget shows the availability of idle cash for investment.pART aN 380 hich subsequent ice to W' ides a measuring devinated. c. Budgeting provi” d and ev2 gponsibility of any one performances are: cor the sole bd by combining the i no! d, Budget preparation and is PreP>" “ational seamen organizatiol ‘naividuall- efforts of many inc! . budget? iv purpose of preparing a budget? an al i 6, Which of the following IS not a oYs plans throughout the entire a. To communicate the comp ‘4 business organizell ion ison of actual pei ‘ormance b. To provide a basis for aes during a given period c. To control revenues and exp! expands its operations d. To make sure that the company exP: : , nef 7. Which of the following is not considered to be a benefit of participative budgeting” a a. Participative budgeting results in greater support of the organization because individuals at all levels of the organization are recognized as being part of the team. b. Participative budgeting involves those most directly affected. c. Top management need not be concerned with the overall profitability of the current operations because lower level managers set the final target for the budget. d. Participative budgeting improves accountability because managers are held responsible for reaching their goal h that they cannot shift their responsibilty by Be Pd unrealistic goals demanded by the budget. 7 ng 8. A budget is a control techni chnique thal ' @ performance standard, However’. rete re a was, establishes hoe efforts are to be evaluated is to Teen ton of @ manager ae i the following abou ee slack into the 7 sla is i peauetany ck can best he des ry slack is incorrect? b. The use ee budgeted expenses, Mbed as the Planned ° ludgetary s} . to control subordin; a Prohibit late S the 7 Perfo) use of t buen Perspective of corpo the budget slack jj em resource allocation, "25° the iets the use a od of inefficientter 8 Financial Planning and Budgets cna 1B, 14, d. Budgetary slack eliminates the likeliho od that a manager will receive the personal rewards that follow from meeting the expectations of superiors. The master budget a. b. G d. shows a comparison of forecasted and actual results. is composed of the operating and financial budgets. reflects only those costs controllable by the individual manager. is the budget of the master of the firm. In budgeting, a planning calendar is the a b. CG d. schedule of dates at which goals are to be met. calendar year covered by the budget. schedule of activities for the development and adoption of the budget. schedule of dates when new products should be launched in the market. . A budget manual describes. how a budget is to be prepared. It usually includes a budget planning calendar and a. b. c d. the company policies regarding the authorization of transactions. documentation of the accounting system software. distribution instructions for budget schedules. a chart of accounts. . The budget element(s) included in the financial budget process are the following, except the a b. C d. budgeted balance sheet. capital budget. cash budget and budgeted statement of cash flows. budget variance. Following are parts of the operating budget, except a. sales budget. c.) capital budget. b. materials cost budget. d. production budget. The starting point in preparing a comprehensive budget is a. b. the cash budget. the budgeted income statement.pant 2 MANAUE’ 382 st. . the sales forec? / 4 the production pudget alia ca einiaialle se Jing cannot De us Which of the following Ce" et? = sales volume for a master bud ions ; regression analysis and a Management analysis am ding b. Statistical analysis a e and market history econometric stu ; ‘cit c. Estimation from previous sales VO! d._ None of the above ment should he budgeting process, top manage | 6 ms eat er involement because they lack the detailed knowledge of the daily operations. b. be involved only in the approval process. i i cc. separate the budgeting process and the business planning process into two separate processes. d. be involved, including using the budget process to communicate goals. 17. A strategic budget t a. isa short-range management tool. b. describes the long-term position, goals, and objectives of an organization within its environment. c. involves evaluating specific long-term i isi p investment decisions. d. is a short-range consideration related to liquidity. 18. When developing a bud jet, ar i ii planning proves is get, an external factor to consider in the a. the activities of competi petitors, b. development of new product, c. the implementation of emplo, d. a change in menegenee retirement plan. 7 y tools ij comm Y in one, nications, motivation, ang one be used for planning, process to serve effecti ij a. the organiz; ectively as a contro} tool, For the budgetary ation mu; b. a budget commit st have a by mittee must 1° eud9et direct st be organi for. nized, c. forecasti casting Procedures ust be a ‘veloped,chapte' 20. 23, 24, 389 §~ Financial Planning and Budgets system must be integrated or d. the budgeting and accounting tional structure. synchronized with the organiza individual budget that would provide get would be the qn developing an annual master budget, schedules are prepared, The budget schedule the necessary input data for the direct labor bud a. schedule of cash receipts and disbursements. b. sales forecast. c._ production budget. d. raw materials purchases budget. Among the components of the operating budget is the selling and administrative expenses budget, which a. is usually optional. b. is composed only of fixed costs. c._ is difficult to allocate by month and therefore presented asa jump sum figure for the whole year. should be detailed so that the key assumptions can be better understood. . One component of the financial budget is the cash budget. It is prepared periodically to facilitate cash planning and control. {ts purpose is to anticipate cash needs while minimizing the amount of idle cash. The cash receipts section of the budget include: all sources of cash, among which is ” a. depreciation. b. factory supplies. c. extinguishment of debt. d. loan proceeds. reparation process typically, begins with the 5: paration of the bud prepared \ The budget p' budget and continues through the pre! financial statements. The last budget schedule the financial statements is the a. taxes and licenses budget. b. cash budget. c. selling and administrative expenses budget. d. cost of goods sold budget. ft of its budgeted income res its first dral her projecte” When a company prepa statement, management must evaluate whetlANAGEME —_ part 2~ “his evaluation is 384 a Thi obje' St mpany 9 exceP mings would meet & 2 Following © fo such as industry: based on factors ghar ii ngs Fe ms i a desired cas for other fir : seid price eat ings juin. a desired internal rate of Te vents a year ee bat can reuably forecast e y works best for @ firm or more in the future. b. presents the budgeted nts can be adjuste aoe c. aos Oren month or quarter and adds a fu or quarter as the curr! nt month or quarter Is completed. \e CUFT d. assumes the continuous improvement 0 products and processes. 26. Which of the following statements about flexible budgets is false? 25. Acor amounts for 2 range of activities so d for changes in activity. A flexible budget a. is a series of budgets prepared for various levels of activity. b. accommodates: changes in activity levels so that actual results can be compared’with meaningful budget amounts. & is used to sales capacity use. |. assumes that total fixed i i constant within the weenie Ee ieee 27. erorased ee (ZBB) is a budgetary process . ich the budget is |; é tenes argely based on the expenditures of C. where the bulge we Commitment, * Period of time, but rere th jet varia i d. th int divides the activities of indi ‘an a eS that “sponsibility centers ™ a Cost-benefit perspec ortized after being 28. Unlike in Zero-ba: , c sed budgeting ; 3. requires @ managar to po cremet er to fics ntal i ‘92 to justify the enti acting jet for each year.chanter 8~F 29. A life-cycle budget is a budgeting tool or process 30. 31. 32, 33, 385 inancial Planning end Budgets b. eliminates the need to review all functions periodically to obtain optimum use of resources. c. simply adjusts the current year’s budget to allow for changes planned for the coming year. d._ starts from a bas2 of zero. a. which summarizes all of a company’s budgets and plans. b._ in which estimates of revenues and expenses are prepared for each product beginning with the product's research and developnient phase and traced through its customer support phase. which emphasizes the cost of activities. d. which requires each manager to justify his/her unit’s entire budget each budget period. > In this budgeting process, the budget is based not on the existing system, but on changes or improvements that are to be made. It assumes the continuous improvement of products and processes. a. Zenkai Budgeting c. Keizan Budgeting b. Kaizen Budgeting d. Zankei Budgeting Unlike in a private-sector budget, this type of budget is not only a financial plan and a basis for performance evaluation, but also an expression of public policy and a form of control having the force of law. a. Public Budget c. Legal Budget b. Personal Budget d.\, Governmental Budget Erie Trading Co. budgeted merchandise purchases of 40,000 units next month. The expected beginning inventory is 12,000 ~ units and the desired inventory at the end of next month is 15,000 its. Budgeted sales in units for next month is - a,’ 37,000. c, 55,000. B, 43,000. d. 52,000. Edil Producers, Inc. will start its commercial operations on January 1, 200A. The sales forecast per the sales manager's estimates for its first. year of operations is 50,000 units. However, the Production manager estimated that only 80% of the sales forecast can be produced with the available workforce and equipment. The