Professional Documents
Culture Documents
55
12.Statements in which all items are expressed only in relative terms amount in the subsequent year.
(percentages of a base) are termed: D. There is a negative amount in the base year and a positive
A. Vertical statements C. Funds Statements amount in the subsequent year.
B. Horizontal Statements D. Common-Size Statements
14.Horizontal analysis is a technique for evaluating a series of financial
10.The percent of property, plant and equipment to total assets is an statement data over a period of time
example of: A. that has been arranged from the highest number to the lowest
A. vertical analysis C. profitability analysis number.
B. solvency analysis D. horizontal analysis B. that has been arranged from the lowest number to the highest
number.
15.Vertical analysis is a technique that expresses each item in a C. to determine which items are in error.
financial statement D. to determine the amount and/or percentage increase or
A. in pesos and centavos. decrease that has taken place.
B. as a percent of the item in the previous year.
C. as a percent of a base amount. Trend analysis
D. starting with the highest value down to the lowest value. 16.Trend analysis allows a firm to compare its performance to:
A. other firms in the industry C. other industries
17.In performing a vertical analysis, the base for prepaid expenses is B. other time periods within the firm D. none of the above
A. total current assets. C. total liabilities.
B. total assets. D. prepaid expenses in a Risk and return
previous year. 29.The present and prospective stockholders are primarily concerned
with a firm’
Horizontal analysis A. profitability C. leverage
8. The percentage analysis of increases and decreases in individual B. liquidity D. risk and return
items in comparative financial statements is called:
A. vertical analysis C. profitability analysis 69.Which suppliers of funds bear the greatest risk and should therefore
B. solvency analysis D. horizontal analysis earn the greatest return?
A. common stockholders C. preferred shareholders
11.Horizontal analysis is also known as B. general creditors such as banks D. bondholders
A. linear analysis. C. trend analysis.
B. vertical analysis. D. common size analysis. Measures of Risk
54.The following groups of ratios primarily measure risk:
13.In which of the following cases may a percentage change be A. liquidity, activity, and common equity C. liquidity, activity,
computed? and debt
A. The trend of the amounts is decreasing but all amounts are B. liquidity, activity, and profitability D. activity, debt, and
positive. profitability
B. There is no amount in the base year.
C. There is a negative amount in the base year and a negative Financial ratios
56
35.Short-term creditors are usually most interested in assessing 51.Which of the following ratios would be least helpful in appraising
A. solvency. C. marketability. the liquidity of current assets?
B. liquidity. D. profitability. A. Accounts Receivable turnover C. Current Ratio
B. Days’ sales in inventory D. Days’ sales in accounts
36.The two categories of ratios that should be utilized to asses a firm’s receivable
true liquidity are the
A. current and quick ratios C. liquidity and profitability ratios 53.Which ratio is most helpful in appraising the liquidity of current
B. liquidity and debt ratios D. liquidity and activity ratios assets?
A. current ratio C. acid-test ratio
47.Which of the following is the most of interest to a firm’s suppliers? B. debt ratio D. accounts receivable turnover
A. profitability C. asset utilization
B. debt D. liquidity Not a measure of liquidity
57
79.Which one of the following ratios would not likely be used by a A. current ratio.
short-term creditor in evaluating whether to sell on credit to a B. current cash debt coverage ratio.
company? C. cash debt coverage ratio.
A. accounts receivable turnover. C. acid test ratio. D. acid-test ratio.
B. asset turnover. D. current ratio.
23.The acid-test or quick ratio
Current ratio A. is used to quickly determine a company’s solvency and long-
24.Typically, which of the following would be considered to be the term debt paying ability.
most indicative of a firm's short-term debt paying ability? B. relates cash, short-term investments, and net receivables to
A. working capital C. acid test ratio current liabilities.
B. current ratio D. days’ sales in receivables C. is calculated by taking one item from the income statement and
one item from the balance sheet.
22.The current ratio is D. is the same as the current ratio except it is rounded to the
A. calculated by dividing current liabilities by current assets. nearest whole percent.
B. used to evaluate a company’s liquidity and short-term debt
paying ability. Not a liquidity ratio
C. used to evaluate a company’s solvency and long-term debt 28.Which one of the following would not be considered a liquidity ratio?
paying ability. A. Current ratio. C. Quick ratio.
D. calculated by subtracting current liabilities from current assets. B. Inventory turnover. D. Return on assets.
58
59
60
82.Which of the following ratios appears most frequently in annual Financial Statement Analysis
reports? Accounts Receivable
A. Earnings per Share C. Profit Margin 26.Which of the following reasons should not be considered in order to
B. Return on Equity D. Debt/Equity explain why the receivables appear to be abnormally high?
A. Sales volume decreases materially late in the year.
Return on assets B. Receivables have collectibility problems and possibly some
64.Return on assets should have been written off.
A. can be determined by looking at a balance sheet C. Material amount of receivables are on the installment basis.
B. should be smaller than return on sales D. Sales volume expanded materially late in the year.
C. can be affected by the company’s choice of a depreciation
method 31.An acceleration in the collection of receivables will tend to cause
D. should be larger than return on equity the accounts receivable turnover to:
A. decrease C. either increase or decrease
Return on investments B. remain the same D. increase
72.Return on investment measures:
A. return to all suppliers of funds C. return to all long-term Inventories
suppliers of funds 32.Which of the following would best indicate that the firm is carrying
B. return to all long-term creditors D. return to stockholders excess inventory?
A. a decline in the current ratio
Market test ratios B. stable current ratio with declining quick ratios
Price-earnings ratio C. a decline in days' sales in inventory
56.The price/earnings ratio D. a rise in total asset turnover
A. measures the past earning ability of the firm
B. is a gauge of future earning power as seen by investors 89.When Tri-C Corp. compares its ratios to industry averages, it has a
C. relates price to dividends higher current ratio, an average quick ratio, and a low inventory
D. relates turnover. What might you assume about Tri-C?
A. Its cash balance is too low. C. Its current liabilities are too
58.Which of the following ratios usually reflects investors opinions of low.
the future prospects for the firm? B. Its cost of goods sold is too low. D. Its average inventory is
A. dividend yield C. book value per share too high.
B. price/earnings ratio D. earnings per share
Current ratio
Dividend yield 33.Which of the following would be most detrimental to a firm's current
57.Which of the following ratios represents dividends per common ratio if that ratio is currently 2.0?
share in relation to market price per common share? A. Buy raw materials on credit
A. dividend payout C. price/earnings B. Sell marketable securities at cost
B. dividend yield D. book value per share C. Pay off accounts payable with cash
D. Pay off a portion of long-term debt with cash
61
62
A. Convert marketable securities to cash. B. Smith Company's times interest earned should be lower than
B. Pay accounts payable with cash. Jones.
C. Buy inventory with short term credit (i.e. accounts payable). C. Smith has five times better long-term borrowing ability than
D. Sell inventory at cost. Jones.
D. Not enough information to determine if any of the answers are
Acid-test ratio correct.
38.If a company has an acid-test ratio of 1.2:1, what respective
effects will the borrowing of cash by short-term debt and collection Times interest earned
of accounts receivable have on the ratio? 85.Which of the following will not cause times interest earned to drop?
A. B. C. D. Assume no other changes than those listed.
Short-term Increase Increase Decrease Decrease A. A rise in preferred stock dividends.
borrowing B. A drop in sales with no change in interest expense.
Collection of No effect Increase No effect Decrease C. An increase in interest rates.
receivable D. An increase in bonds payable with no change in operating
income.
Profit margin
70.Which of the following would most likely cause a rise in net profit DuPont Analysis
margin? 71.Which of the following could cause return on assets to decline when
A. increased sales C. decreased operating expenses net profit margin is increasing?
B. decreased preferred dividends D. increased cost of sales A. sale of investments at year-end C. purchase of a new
building at year-end
Return on assets B. increased turnover of operating assets D. a stock split
67.Return on assets cannot fall under which of the following
circumstances? 80.A firm with a lower net profit margin can improve its return on total
A. B. C. D. assets by
Net profit Decline Rise Rise Decline A. increasing its debt ratio C. increasing its total asset
margin turnover
Total asset Rise Decline Rise Decline B. decreasing its fixed assets turnover D. decreasing its total
turnover asset turnover
Debt ratio
83.Jones Company has long-term debt of P1,000,000, while Smith PROBLEMS:
Company, Jones' competitor, has long-term debt of P200,000. Horizontal analysis
1
Which of the following statements best represents an analysis of . Kline Corporation had net income of P2 million in 2006. Using the
the long-term debt position of these two firms? 2006 financial elements as the base data, net income decreased by
A. Jones obviously has too much debt when compared to its 70 percent in 2007 and increased by 175 percent in 2008. The
competitor. respective net income reported by Kline Corporation for 2007 and
2008 are:
63
64
P410,000 at the end of the year. The net credit sales during the Inventory, end of 2007 P 376,526
year amounted to P4,000,000. Using 360-day year, what is the The merchandise inventory turnover for 2007 is:
average collection period of the receivables? A. 5.6 C. 7.5
A. 30 days C. 73 days B. 15.6 D. 7.7
B. 65 days D. 36 days
14
. Based on the following data for the current year, what is the
Cash collection inventory turnover?
10
. Deity Company had sales of P30,000, increase in accounts payable Net sales on account during year P 500,000
of P5,000, decrease in accounts receivable of P1,000, increase in Cost of merchandise sold during year 330,000
inventories of P4,000, and depreciation expense of P4,000. What Accounts receivable, beginning of year 45,000
was the cash collected from customers? Accounts receivable, end of year 35,000
A. P31,000 C. P34,000 Inventory, beginning of year 90,000
B. P35,000 D. P25,000 Inventory, end of year 110,000
A. 3.3 C. 3.7
Inventory turnover B. 8.3 D. 3.0
11
. During 2007, Tarlac Company purchased P960,000 of inventory.
The cost of goods sold for 2007 was P900,000, and the ending Days inventory
15
inventory at December 31, 2007 was P180,000. What was the . Selected information from the accounting records of Eternity
inventory turnover for 2007? Manufacturing Company follows:
A. 6.4 C. 5.3 Net sales P3,600,000
B. 6.0 D. 5.0 Cost of goods sold 2,400,000
Inventories at January 1 672,000
12
. Selected information from the accounting records of Petals Inventories at December 31 576,000
Company is as follows: What is the number of days’ sales in average inventories for the
Net sales for 2007 P900,000 year?
Cost of goods sold for 2007 600,000 A. 102.2 C. 87.6
Inventory at December 31, 2006 180,000 B. 94.9 D. 68.1
Inventory at December 31, 2007 156,000
Petals’ inventory turnover for 2007 is Turnover ratios
A. 5.77 times C. 3.67 times Asset turnover
B. 3.85 times D. 3.57 times Asset
16
. Net sales are P6,000,000, beginning total assets are P2,800,000,
13
. The Moss Company presents the following data for 2007. and the asset turnover is 3.0. What is the ending total asset
Net Sales, 2007 P3,007,124 balance?
Net Sales, 2006 P 930,247 A. P2,000,000. C. P2,800,000.
Cost of Goods Sold, 2007 P2,000,326 B. P1,200,000. D. P1,600,000.
Cost of Goods Sold, 2007 P1,000,120
Inventory, beginning of 2007 P 341,169 Solvency ratios
65
Debt ratio Common stock, P50 par (no change during year) 2,000,000
17
. Jordan Manufacturing reports the following capital structure: Income before income tax for year 350,000
Current liabilities P100,000 Income tax for year 80,000
Long-term debt 400,000 Common dividends paid 50,000
Deferred income taxes 10,000 Preferred dividends paid 15,000
Preferred stock 80,000 Based on the data presented above, what is the number of times
Common stock 100,000 bond interest charges were earned (round to one decimal point)?
Premium on common stock 180,000 A. 3.7 C. 4.5
Retained earnings 170,000 B. 4.4 D. 3.5
What is the debt ratio?
21
A. 0.48 C. 0.93 . The following data were abstracted from the records of Johnson
B. 0.49 D. 0.96 Corporation for the year:
Sales P1,800,000
Times interest earned Bond interest expense 60,000
18
. House of Fashion Company had the following financial statistics for Income taxes 300,000
2006: Net income 400,000
Long-term debt (average rate of interest is 8%) P400,000 How many times was bond interest earned?
Interest expense 35,000 A. 7.67 C. 12.67
Net income 48,000 B. 11.67 D. 13.67
Income tax 46,000
Operating income 107,000 Net income
22
What is the times interest earned for 2006? . The times interest earned ratio of Mikoto Company is 4.5 times.
A. 11.4 times C. 3.1 times The interest expense for the year was P20,000, and the company’s
B. 3.3 times D. 3.7 times tax rate is 40%. The company’s net income is:
A. P22,000 C. P54,000
19
. Brava Company reported the following on its income statement: B. P42,000 D. P66,000
Income before taxes P400,000
Income tax expense 100,000 Profitability Ratios
Net income P300,000 Return on Common Equity
23
An analysis of the income statement revealed that interest expense . Selected information for Ivano Company as of December 31 is as
was P100,000. Brava Company’s times interest earned (TIE) was follows:
A. 5 times C. 3.5 times 2006 2007
B. 4 times D. 3 times Preferred stock, 8%, par P100, P250,000 P250,000
nonconvertible, noncumulative
20
. The balance sheet and income statement data for Candle Factory Common stock 600,000 800,000
indicate the following: Retained earnings 150,000 370,000
Bonds payable, 10% (issued 1998 due 2022) P1,000,000 Dividends paid on preferred stock for 20,000 20,000
Preferred 5% stock, P100 par (no change during year)300,000 the year
66
Net income for the year 120,000 240,000 net income for the year ended December 31 was P50,000. The
Ivano’s return on common stockholders’ equity, rounded to the yearly preferred dividend was declared. No capital stock
nearest percentage point, for 2007 is transactions occurred. What was the price earnings ratio on
A. 17% C. 21% Orchard’s common stock at December 31?
B. 19% D. 23% A. 6 to 1 C. 10 to 1
B. 8 to 1 D. 16 to 1
Dividend yield
27
24
. The following information is available for Duncan Co.: . On December 31, 2006 and 2007, Renegade Corporation had
2006 100,000 shares of common stock and 50,000 shares of
Dividends per share of common stock P 1.40 noncumulative and nonconvertible preferred stock issued and
Market price per share of common stock 17.50 outstanding.
Which of the following statements is correct? Additional information:
A. The dividend yield is 8.0%, which is of interest to investors Stockholders’ equity at 12/31/07 P4,500,000
seeking an increase in market price of their stocks. Net income year ended 12/31/07 1,200,000
B. The dividend yield is 8.0%, which is of special interest to Dividends on preferred stock year ended 12/31/07 300,000
investors seeking current returns on their investments. Market price per share of common stock at 12/31/07 144
C. The dividend yield is 12.5%, which is of interest to bondholders. The price-earnings ratio on common stock at December 31, 2007,
D. The dividend yield is 8.0 times the market price, which is was
important in solvency analysis. A. 10 to 1 C. 14 to 1
B. 12 to 1 D. 16 to 1
Market Test Ratios
Market/Book value ratio Payout ratio
28
Price per share . Selected financial data of Alexander Corporation for the year ended
25
. What is the market price of a share of stock for a firm with 100,000 December 31, 2007, is presented below:
shares outstanding, a book value of equity of P3,000,000, and a Operating income P900,000
market/book ratio of 3.5? Interest expense (100,000)
A. P8.57 C. P85.70 Income before income taxes 800,000
B. P30.00 D. P105.00 Income tax (320,000)
Net income 480,000
P/E ratio Preferred stock dividend (200,000)
26
. Orchard Company’s capital stock at December 31 consisted of the Net income available to common stockholders 280,000
following: Common stock dividends were P120,000. The payout ratio is:
• Common stock, P2 par value; 100,000 shares authorized, A. 42.9 percent C. 25.0 percent
issued, and outstanding. B. 66.7 percent D. 71.4 percent
• 10% noncumulative, nonconvertible preferred stock, P100
par value; 1,000 shares authorized, issued, and outstanding. P/E ratio & Payout ratio
Orchard’s common stock, which is listed on a major stock Use the following information for question Nos. 33 and 34:
exchange, was quoted at P4 per share on December 31. Orchard’s Terry Corporation had net income of P200,000 and paid dividends to
67
68
69
Comprehensive
42
. The balance sheets of Magdangal Company at the end of each of
the first two years of operations indicate the following:
2007 2006
Total current assets P600,00 P560,00
0 0
Total investments 60,000 40,000
Total property, plant, and equipment 900,000 700,000
Total current liabilities 150,000 80,000
Total long-term liabilities 350,000 250,000
Preferred 9% stock, P100 par 100,000 100,000
Common stock, P10 par 600,000 600,000
Paid-in capital in excess of par- 60,000 60,000
common stock
Retained earnings 300,000 210,000
Net income is P115,000 and interest expense is P30,000 for 2007.
What is the rate earned on total assets for 2007 (round percent to
one decimal point)?
A. 9.3 percent C. 8.9 percent
B. 10.1 percent D. 7.4 percent
43
. What is the rate earned on stockholders' equity for 2007 (round
percent to one decimal point)?
A. 10.6 percent C. 12.4 percent
B. 11.2 percent D. 15.6 percent
44
. What is the earnings per share on common stock for 2007, (round
to two decimal places)?
A. P1.92 C. P1.77
B. P1.89 D. P1.42
45
. If the market price is P30, what is the price-earnings ratio on
common stock for 2007 (round to one decimal point)?
A. 17.0 C. 12.4
B. 12.1 D. 15.9
70
1
. Answer: A
2007: P2,000,000 (1 – 0.7) = P600,000
2008: P2,000,000 (1 + 1.75) = P5,500,000
Note: For 2007 & 2008, 2006 was used as a base year.
2
. Answer: C
3
. Answer: C
Current Assets:
Cash P100,000
Accounts receivable 200,000
Total liquid assets 300,000
Inventory 440,000
Total current assets P740,000
Current Liabilities:
Accounts payable P 80,000
Notes payable, due in 6 months 250,000
Interest payable 25,000
Total current liabilities P355,000
Before any payment, the current ratio is above 1:1 and acid test ratio is below 1:1.
Therefore, the current ratio shall rise but acid test ratio shall go down. If any of these
two ratios is below 1:1, the equal change in current assets and current liabilities
brings direct effect on the ratio, that is, equal increase in current assets and current
liabilities causes the ratio to rise.
4
. Answer: A
Working capital equals the difference between the total current assets and total
current liabilities.
Current Assets:
Cash P 80,000
Marketable securities 250,000
Accounts receivable 110,000
Total liquid assets 440,000
Inventory 140,000
Prepaid expense 15,000
Total Current Assets P595,000
Current Liabilities:
Accounts payable P145,000
Income tax payable 10,000
Notes payable, short-term 85,000
Accrued liabilities 4,000 244,000
6
. Answer: A
Acid-Test Ratio: Liquid Assets ÷ Current Liabilities
(P440,000 ÷ P244,000) = 1.80:1.00
7
. Answer: D
AR Turnover: Credit sales ÷ Average AR
6,500,000/650,000 = 10.0 times
8
. Answer: C
Accounts Receivable Turnover: Net Credit Sales ÷ Average Accounts Receivable
P1,500,000 ÷ [(P200,000 + P400,000) ÷ 2] = 5.0 times
9
. Answer: D
Average Daily Sales: Annual credit sales ÷ Days’ Year
P4 million ÷ 360 days = P11,111
Alternative Computation:
Average daily cost of goods sold: = (P2,400,000 ÷ 365)P6,575.34
Turnover in Days: P624,000 ÷ P6,575.34 94.9 days
16
. Answer: A
Average Accounts Receivable: (P900,000 ÷ P1,000,000) ÷ 2P 950,000
Average inventory; (P1.1M + P1.2M) ÷ 2 P1,150,000
40
. Answer: C
Dividend per share: 0.75 x P2.20 P1.65
Market price: 10 x 2.20 22.00
Dividend yield: P1.65 ÷ P22.00 = 7.5%
41
. Answer: D
EBIT 1,250,000
Less interest expense 250,000
Earnings before tax 1,000,000
Less Income tax 40% 400,000
Net income 600,000
Less Preferred dividends 200,000
Earnings to Common Stock 400,000
Earnings per share 400,000/25,000 16.00
Dividend per share: 400,000 x 0.40 ÷ 25,000 6.40