Chapter 12

Financial Statement Analysis

Theories (Multiple Choice)

1. Which of the following statements regarding financial analysis is true?

A. Financial analysis will show how a company is guaranteed to perform in the future.
B. Financial analysis should not be relied upon as an indicator of future performance.
C. Financial analysis should be performed only by managers and creditors.
D. Financial analysis provides supplemental information not provided directly by the
financial statements.
2. Which of the following is not a limitation of financial statement analysis?
A. The cost basis.
B. The use of estimates.
C. The diversification of firms.
D. The availability of information.
3. Which of the following statements is true regarding ratio analysis?
A. A ratio for a particular company is often compared to industry standards using various
publications.
B. A ratio for a particular company is unique, and, therefore, should not be compared to
other companies' ratios.
C. Ratio analysis should be kept as simple as possible, often accomplished by using just
one ratio to measure a company's performance,
D. Ratio analysis will not be affected by different accounting methods or assumptions.
4. Suppose you are comparing two firms in the steel industry. One firm is large and the
other is small. Which type of numbers would be most meaningful for statement analysis?
A. Absolute numbers would be most meaningful for both the large and small firm.
B. Absolute numbers would be most meaningful in the large firm; relative numbers
would be most meaningful in the small firm.
C. Relative numbers would be most meaningful for the large firm; absolute numbers
would be most meaningful for the small firm.
D. Relative numbers would be most meaningful for both the large and small firm,
especially for interfirm comparisons.

5. Which of these statements is false?

A. Many companies will not clearly fit into any one industry.
B. A financial service uses its best judgment as to which industry the firm best fits.
 C. The analysis of an entity's financial statements can be more meaningful if the results
are compared with industry averages and with results of competitors.
D. A company comparison should not be made with industry averages if the company
does not clearly fit into any one industry.
6. Biloxi, Inc. is a retailer with annual sales of less than P10 million. At the end of 2010, ratio
analysis is performed on Biloxi's financial statements by various stakeholders. Biloxi's 2010
ratios are not likely to be compared to:
A. Biloxi's 2009 ratios.
B. Biloxi's 2010 budgeted ratios.
C. Other retailers with annual sales of less than P10 million.
D. A manufacturer with annual sales of less than P10 million.
7. Management is a user of financial analysis. Which of the following comments does not
represent a fair statement as to the management perspective?
A. Management is always interested in maximum profitability.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity.
D. Management is interested in the asset structure of the entity.
8. Ratios are used as tools in financial analysis
A. instead of horizontal and vertical analyses.
B. because they can provide information that may not be apparent from inspection of the
individual components of a particular ratio.
C. because even single ratio by itself is quite meaningful.
D. because they are prescribed by PFRS.
9. Analyzing financial statement account balances over time for the same company is called:
A. vertical analysis.
B. horizontal analysis.
C. common-size analysis.
D. price analysis.
10. The percentage analysis of increases and decreases in individual items in comparative
financial statements is called:
A. vertical analysis
B. solvency analysis
C. profitability analysis
D. horizontal analysis
11. Which of the following statements regarding horizontal analysis is false?
 A. Horizontal analysis can include more than two years of financial data.
B. Horizontal analysis is facilitated by computing peso and percentage changes in
financial statement items.
C. Horizontal analysis analyzes ratio differences occurring between companies.
D. Horizontal analysis can include the statement of cash flows.
12. Which of the following generally is the most useful in analyzing companies of different
sizes?
A. comparative statements
B. common-size financial statements
C. price-level accounting
D. profitability index
13. Statements in which all items are expressed only in relative terms (percentages of a base) are
'termed:
A. Vertical statements
B. Horizontal Statements
C. Funds Statements
D. Common-Size Statements
14. To perform vertical analysis
A. items on the balance sheet need to be restated to their fair market values.
B. items on the balance sheet need to be indexed for inflation.
C. common-size financial statements need to be prepared.
D. horizontal analysis should have been done already.
15. In which of the following cases may a percentage change be computed?
A. The trend of the amounts is decreasing but all amounts are positive.
В. There is no amount in the base year.
C. There is a negative amount in the base year and a negative amount in the subsequent
year.
D. There is a negative amount in the base year and a positive amount in the subsequent
year.
16. Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time
A. that has been arranged from the highest number to the lowest number.
B. that has been arranged from the lowest number to the highest number.
 C. to determine which items are in error.
D. to determine the amount and/or percentage increase or decrease that has taken place.
17. Vertical analysis is a technique that expresses each item in a financial statement
A. in pesos and centavos.
B. as a percent of the item in the previous year.
C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.
18. Trend analysis allows a firm to compare its performance to:
A. other firms in the industry
B. other time periods within the firm
C. other industries
D. none of the given choices
19. In the near term, the important ratios that provide the information critical to the short-run
operation of the firm are:
A. liquidity, activity, and profitability
B. liquidity, activity, and debt
C. liquidity, activity, and equity
D. activity, debt, and profitability
20. The primary concern of short-term creditors when assessing-the strength of a firm is the
entity's
A. short-term liquidity
B. profitability
C. market price of stock
D. leverage
21. Which of the following is a measure of the liquidity position of a corporation?
A. earnings per share
B. inventory turnover
C. current ratio
 D. number of times interest charges earned
22. The ratios that are used to determine a company's short-term debt paying ability are
A. asset turnover, times interest earned, current ratio, and receivables turnover.
B. times interest earned, inventory turnover, current ratio, and receivables curnover.
C. times interest earned, acid-rest ratio, current ratio, and inventory turnover.
D. current ratio, acid-test ratio, receivables turnover, and inventory turnover.
23. The current ratio is
A. calculated by dividing current liabilities by current assets.
B. used to evaluate a company's liquidity and short-term debt paying ability.
C. used to evaluate a company's solvency and long-term debt paying ability.
D. calculated by subtracting current liabilities from current assets.
24. Which of the following ratios is the best measure of liquidity?
A. Debt-to-equity ratio
B. Times-interest-earned ratio
C. Return on assets ratio
D. Acid-test ratio
25. The acid test or quick ratio
A. is used to quickly determine a company's solvency and long-term debt paying ability
B. relates cash, short-term investments, and net receivables to current liabilities.
C. is calculated by taking one item from the income statement and one item from the
balance sheet.
D. is the same as the current ratio except it is rounded to the nearest whole percent.
26. Typically, which of the following would be considered to be the most indicative of a firm's
short-term debt paying ability?
A. working capital.
B. current ratio.
C. acid test ratio.
D. days’ sales in receivable.
27. Which of the following does not bear on the quality of receivables?
A. shortening the credit terms
B. lengthening the credit terms
C. lengthening the outstanding period
D. all of the given choices bear on the quality of receivables
28. Which of the following reasons should not be considered in order to explain why the
receivables appear to be abnormally high?
A. Sales volume decreases materially late in the year.
B. Receivables have collectibility problems and possibly some should have been written
off.
C. Material amount of receivables are on the installment basis.
D. Sales volume expanded materially late in the year.
29. A general rule to use in assessing the average collection period is.
A. that is should not exceed 30 days.
B. it can be any length, as long as the customer continues to buy merchandise.
C. that it should not greatly exceed the discount period.
D. that it should not greatly exceed the credit term period.
30. The present and prospective stockholders are primarily concerned with a firm's
A. profitability
B. liquidity
C. leverage
D. risk and return
31. Which of the following ratios is rated to be a primary measure of liquidity and considered of
highest significance rating of the liquidity ratios a bank analyst?
A. Debt/Equity
B. Current ratio
C. Degree of Financial Leverage
D. Accounts Receivable Turnover in Days
32. As a company's accounts receivable turnover ratio increases from one year to the next, they
will find that the number of days' sales in receivables:
A. decreases.
B. increases.
C. stays the same.
D. can not be determined.
33. An acceleration in the collection of receivables will tend to cause the accounts receivable
turnover to:
A. decrease
B. remain the same either
C. increase or decrease
D. increase
34. Primera, Inc. has recently calculated the accounts receivable turnover for the current year to
be 15. In prior years, the same ratio was always higher. Which of the following statements would
be the best interpretation for the reason for the ratio's change?
A. The company had less sales in the current year than in prior years.
B. The company had more sales in the current year than in prior years.
C. The company had fewer accounts receivables in the current year than in prior years.
D. The company took longer to collect on their accounts receivables in the current year
than in prior years.
35. Toledo, Inc. has recently calculated the inventory turnover for the current year to be 30. In
prior years, the same ratio was always lower. Which of the following statements would be the
best interpretation for the reason for the ratio's change?
A. The company had less sales in the current. year than in prior years.
B. The company purchased less inventory in the current year than in prior years.
C. The company took fewer days to sell its inventory in the current year than in prior
years.
D. The company took more days to sell its inventory in the current year than in prior
years.
36. Which of the following would best indicate that the firm is carrying excess
inventory?
A. A decline in the current ratio
B. Stable current ratio with declining quick ratios
C. A decline in days' sales in inventory
D. A rise in total asset turnover

[Link] a company's inventory turnover ratio decreases from one year to the next, they will find
that the number of days inventory is held before sale:
A. decreases.
B. increases.
C. stays the same.
D. can not be determined.
38. Which of the following would be most detrimental to a firm’s current ratio if that ratio is
currently 2.0
A. Buy raw material on credit
B. Sell marketable securities at cost
C. Pay off accounts payable with cash
D. Pay off a portion of long term debt with cash
39. The set of ratios that is most useful in evaluating solvency is
A. debt ratio, current ratio, and times interest earned
B. debt ratio, times interest earned, and return on assets
C. debt ratio, times interest earned, and quick ratio
D. debt ratio, times interest earned, and cash flow to debt
40. The two categories of ratios that should be utilized to assess a firm's true liquidity are the
A. current and quick ratios
B. liquidity and debt ratios
C. liquidity and profitability ratios
D. liquidity and activity ratios
41. Which one of the following ratios would nor likely be used by a short-term creditor in
evaluating whether to sell on credit to a company?
A. Current ratio
B. Acid-test ratio
C. Asset turnover
D. Receivable turnover
42. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of
cash in short-term debt and collection of accounts receivable have on the ratio?

Short-term Borrowing Collection of Receivable

A. Increase No effect
B. Increase Increase
C. Decrease No effect
D. Decrease Decrease
43. Solvency measures a company's ability:
A. to meet long-term obligations as they become due.
B. to meet short-term obligations as they become due.
C. to make a profit in the short-run.
D. to make a profit in the long-run.
44. Which of the following ratio would not be the best measure of solvency?
A. Return on asset ratio.
B. Debt to equity ratio
C. Debt service coverage ratio.
D. Times interest earned ratio.
45. The return on assets ratio is affected by the
A. asset turnover ratio.
B. debt to total assets ratio.
C. profit margin ratio.
 D. asset turnover and profit margin ratios.
46. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
A. improve its collection practices, thereby increasing cash and increasing its current and
quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current
liabilities and increasing the current and quick ratios.
C. decrease current liabilities by utilizing more long-term debt, thereby increasing the
current and quick ratios.
D. increase inventory, thereby increasing current assets and the current and quick ratios.
47. A weakness of the current ratio is
A. the difficulty of the calculation.
B. that it does not take into account the composition of the current assets.
C. that it is rarely used by sophisticated analysts.
D. that it can be expressed as a percentage, as a rate, or as a proportion.
48. Trading on equity (leverage) refers to the
A. amount of working capital.
B. amount of capital provided by owners.
C. use of borrowed money to increase the return to owners.
D. earnings per share.
49. Which of the following ratios would be the best measure of solvency?
A. Return on assets ratio
B. Price earnings ratio
C. Current ratio
D. Times-interest-earned ratio
50. The ratio that indicates a company's degree of financial leverage is the
A. cash debt coverage ratio.
B. debt to total assets.
C. free cash flow ratio.
 D. times-interest earned ratio.
51. Which of the following is the most of interest to a firm's suppliers?
A. profitability
B. debt
C. asset utilization
D. liquidity
52. Renant, Inc. has determined that it needs to increase its current ratio in order to comply with
a creditor's loan agreement. All else being equal, which of the following ways would be best for
increasing their current ratio?
A. Increasing long-term assets
B. Decreasing current assets
C. Decreasing current liabilities
D. Increasing long-term liabilities
53. The set of ratios that are most useful in evaluating profitability is
A. ROA, ROE, and debt to equity ratio
B. ROA, ROE, and dividend yield
C. ROA, ROE, and acid-test ratio
D. ROA, ROE, and cash flow to debt
54. Which of the following ratios is most relevant to evaluating solvency?
A. Return on assets
B. Debt ratio
C. Days' purchases in accounts payable
D. Dividend yield
55. Long-term creditors are usually most interested in evaluating
A. liquidity.
B. marketabilty.
C. profitability.
D. solvency.
56. Stockholders are most interested in evaluating
A. liquidity.
B. solvency.
C. profitability.
D. marketability.
57. Which ratio is most helpful in appraising the liquidity of current assets?
A. current ratio
B. debt ratio
C. acid-rest ratio
D. accounts receivable turnover
58. The following groups of ratios primarily measure risk:
A. liquidity, activity, and common equity
В. liquidity, activity, and profitability
С. liquidity, activity, and debt
D. activity, debt, and profitability
59. Which of the following statements would be the best interpretation of a company's low debt-
to-equity ratio?
A. The company chooses to pay cash for most of its major purchases.
B. The company is not liquid.
C. The company prefers to pay stockholders high dividends out of their retained earnings.
D. The company prefers to raise funds by issuing capital stock than long term borrowing.
60. Using financial leverage is a good financial strategy from the viewpoint of stockholders of
companies that have:
A. a high debt ratio.
B. steady or rising profits
C. a steadily declining current ratio
D. cyclical highs and lows
61. The price/earnings ratio:
 A. measures the past earning ability of the firm
B. is a gauge of future earning power as seen by investors
C. relates the price to dividends
D. relates to yield on dividends
62. Which of the following ratios represents dividends per common share in relation to market
price per common share?
A. dividend payout
B. dividend yield
C. price/earnings
D. book value per share
63. Which of the following ratios usually reflects investors opinions of the future prospects for
the firm?
A. dividend yield
B. price/earnings ratio
C. book value per share
D. earnings per share
64. Which ratio would be best for measuring a company's ability to repay both principal and
interest on outstanding loans from cash generated from operating activities?
A. Current ratio
B. Times-interest-earned ratio
C. Debt service coverage ratio
D. Debt-to-equity ratio
65. Which ratio gives an indication of how investors believe a company's stock will perform in
the future compared to other companies?
A. Return on stockholders' equity
B. Earnings per share
C. Price earnings (P/E)
D. Return on assets
66. Return on assets
A. can be determined by looking at a balance sheet
B. should be smaller than return on sales
C. can be affected by the company's choice of a depreciation method
D. should be larger than return on equity
67. Return on assets cannot fall under which of the following circumstances?
Net Profit Margin Total Asset Turnover
A. Decline Rise
B. Rise Decline
C. Rise Rise
D. Decline Decline
68. Which of the following circumstances will cause sales to fixed assets to be abnormally high?
A. A labor-intensive industry.
B. The use of units-of-production depreciation.
C. A highly mechanized facility:
D. High direct labor costs from a new union contract.
69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?
A. common stockholders
B. general creditors such as banks
C. preferred shareholders
D. bondholders
70. Which of the following could cause return on assets to decline when net profit margin is
increasing?
A. sale of investments at year-end
B. increased turnover of operating assets
C. purchase of a new building at year-end
D. a stock split
71. Return on investment measures return to
A. all suppliers of funds
B. all long-term creditors
C. all long-term suppliers of funds
D. stockholders
72. A times interest earned ratio of 0.90 to 1 means that the:
A. firm will default on its interest payment
B. net income is less than the interest expense
C. cash flow is less than the net income
D. cash flow exceeds the net income
73. The ability of a business to pay its debts as they come due and to earn a reasonable amount of
income is referred to as solvency and
A. leverage
B. profitability
C. liquidity
D. equity
74. A firm with a lower net profit margin can improve its return on total assets by
A. increasing its debt ratio
В. decreasing its fixed assets turnover
С. increasing its total asset turnover
D. decreasing its total asset turnover
75. A firm with a total asset turnover lower than the industry standard and a current ratio which
meets industry standard might have excessive
A. accounts receivable
B. fixed assets
C. debt
D. inventory
76. Which of the following ratios appears most frequently in annual reports?
 A. Earnings per Share
B. Return on Equity
C. Profit Margin
D. Debt/Equity
77. Companies A and B are in the same industry and have similar characteristics except that
Company A is more leveraged than Company B. Both companies have the same income before
interest and taxes and the same total assets. Based on this information we could conclude that
A. Company A has higher net income than Company B.
B. Company A has a lower return on assets than company B
C. Company A is more risky than Company B.
D. Company A has a lower debt ratio than company B
78. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before
borrowing P60,000 from the bank with a 3-month note payable. What effect did the borrowing
transaction have on Tyner Company's current ratio?
A. The ratio remained unchanged
B. The change in the current ratio cannot be determined.
C. The ratio decreased.
D. The ratio increased.
79. Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
A. Convert marketable securities to cash.
B. Pay accounts payable with cash.
C. Buy inventory with short term credit (i.e. accounts payable).
D. Sell inventory at cost.
80. The tendency of the rate earned on stockholders. equity to vary disproportionately from
the rate earned on total assets is sometimes referred to as
A. leverage.
B. solvency.
C. yield.
D. quick assets.
Problems:

1. Cave Corporation had net income of P2 million in 2009. Using the 2009
financial elements as the base data, net income decreased by 70 percent in 2010 and increased by
175 percent in 2011.
The respective net income reported by Cave Corporation for 2010 and 2011
are:
A. P 600,000 and P5,500,000
B. P5,500,000 and P 600,000
C. P1,400,000 and P3,500,000
D. P1,400,000 and P5,500,000
Solution:
The use of trend analysis requires a use of a base year. The percentage of change in each
balance each year should be based on the base year data.
2007: X ÷ P2,000,000 = 0.70
X = P2,000,000 x 0.70
X = P1, 400,000
Net income: P2,000,000 - P1,400,000 P600,000
2008: X ÷ P2,000,000 = 1.75
X = P2,000,000 x 1.75
X = P3,500,000
Net income: P2,000,000 + P3,500,000 P5,500,000
2. Assume that Clone Inc. reported a net loss of P50,000 in 2009 and net income of P250,000 in
2010. The increase in net income of P300,000:
A. can be stated as 0%
B. can be stated as 100% increase
C. cannot be stated as a percentage
D. can be stated as 200% increase
3. The following financial data have been taken from the records of Common
Company:
Accounts receivable P 200,000
Accounts Payable 80,000
Bonds Payable Due in 10 years 500,000
Cash 100,000
Interest Payable, due in three months 25,000
Inventory 440,000
Land 800,000
Notes Payable, due in 6 months 250,000

What will happen to the ratios below if common company uses cash to pay 50 percent of its
account payable?
Current Ratio Acid Test Ratio
A. Increase Increase
B. Decrease Decrease
C. Increase Decrease
D. Decrease Increase
Solution
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 P80,000
Notes payable, due in 6 months 250,000
Interest payable 25,000
Total current liabilities P355,000

Current Ratio (740,000 ÷ 355,000) 2.08:1.00

Acid-test Ratio (300,000 ÷ 355,000) 0.85:1.00
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.

Question No. 4 through 6 are based on the data taken from the balance sheets of Circle Company
as the end of the current year:
Accounts Payable P 145,000
Accounts Receivable 110,000
Accrued Liabilities 4,000
Cash 80,000
Income Tax Payable 10,000
Inventory 140,000
Marketable Securities 250,000
Notes Payable, short-term 85,000
Prepaid Expenses 50,000
4. The amount of working capital for the company is:
А. P351,000
 B. P361,000
С. Р211,000
D. P336,000
Solution
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
Working Capital P351,000
5. The company's current ratio as of the balance sheet date is:
A. 2.67:1
B. 2.44:1
C. 2.02:1
D. 1.95:1
Solution
 Current Ratio: Current Assets/ Current Liabilities
(595,000/244,000) [Link]

6. The company's acid-test ratio as of the balance sheet date is:

A. 1.80:1
B. 2.40:1
C. 2.02:1
D. 1.76:1
Solution:
Acid test ratio: Liquid Assets/Current Liabilities
(440,000/244.000) [Link]
7. Clover Hardware Store had net credit sales of P6,500,000 and cast of goods sold of
P5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year
were P600,000 and P700,000, respectively.
The receivables turnover was
A. 7.7 times.
B. 10.8 times.
C. 9.3 times.
D. 10.0 times.
Solution:
AR Turnover: Credit Sales/Average AR
(6,500,000/650,000) 10.00 times
8. Centrum Corporation's books disclosed the following information for the year ended
December 31, 2010:
Net credit sales P 1,500,000
Net cash sales 240,000
Accounts receivable at beginning of year 200,000
Accounts receivable at end of year 400,000
Centrum's accounts receivable turnover is
A. 3.75 times
B. 4.35 times
C. 5.00 times
D. 5.80 times:
Solutions:

9. Cleff Company had sales of P30,000, increase in accounts payable of P5,000, decrease in
accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense of
P4,000. What was the cash collected from customers?
A. P31,000
B. P35,000
C. P34,000
D. P25,000
Solution:
Sales P300,000
Add decrease in Accounts Receivable 1,000
Cash Collected from sale 31,000
10. Crown Clothing Store had a balance in the Accounts Receivable account of P390,000 at the
beginning of the year and a balance of P410,000 at the end of the year. The net credit sales
during the year amounted to P4,000,000. Using 360-day year, what is the average collection
period of the receivables?
A. 30 days
B. 65 days
 C. 73 days
D. 36 days
Solution:
When the balance of accounts receivable at the end of the year is lower than the
balance at the beginning of the year, it is assumed that the amount of collections should be
greater than the amount of sales.

11. During 2010, Central Company purchased P960,000 of inventory. The cost of goods sold for
2010 was P900,000, and the ending inventory at December 31, 2010 was P180,000. What was
the inventory turnover for 2010?
A. 6.4
B. 6.0
C. 5.3
D. 5.0
Solution:

An alternative computation of the inventory turnover is to use net sales instead of cost of
goods sold.
12. Selected information from the accounting records of Corolla Company is as
Net sales for 2010 P 900,000
Cost of goods sold for 2010 600,000
Inventory at December 31, 2009 180,000
Inventory at December 31, 2010 156,000
Petals' inventory turnover for 2010 is
A. 5.77 times
B. 3.85 times
C. 3.67 times
D. 3.57 times
Solutions:
13. The Camel Company presents the following data for 2010.
Net sales, 2010 P 3,007,124
Net sales, 2009 930,247
Cost of good sold, 2010 2,000,326
Cost of good sold, 2009 1,000,120
Inventory, beginning of 2010 341,169
Inventory, end of 2010 376,526
The merchandise inventory turnover for 2010 is:
A. 5.6
B. 15.6
C. 7.5
D. 7.7
Solutions:
14. Based on the following data for the current year, what is the inventory turnover?
Net Sales on account during year 500,000
Cost of merchandise sold during year 330,000
Accounts receivable, beginning of year 45,000
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000
Inventory, end of year 110,000

A. 3.3
В. 8.3
С. 3.7
D. 3.0

Solutions:

15. The current assets of Canon Enterprise consists of cash, accounts receivable, and inventory.
The following information is available:
Credit Sales 75% of total sales
Inventory turnover 5 times
Working Capital P 1,120,000
Current Ratio 2.00 to 1
Quick Ratio 1.25 to 1
Average collection period 42 days
Working Days 360
The estimated inventory amount is
A. 840,000
B. 600,000
C. 720,000
D. 550,000
Solutions:
The inventory amount can be calculated as follows:
Current Liabilities: Working Capital= current liabilities based on 2:1 current ratio. At
2:1 current ratio, the amount of working capital and current liabilities are both P1,120,000.

Inventory: Current liabilities x ( current ratio – acid test ratio)

P1,120,000 x (2.0- 1.25) P840,000

A detailed computation can be made as follows:

Current Assets: P1,120,000 x 2 P2,240,000
Liquid Assets: P1,120,000 x 1.25 P1,400,000
Inventory P840,000
16. Selected data from Claudine Company’s year-end financial statements are presented below.
The difference between average and ending inventory is immaterial.
Current Ratio 2.0
Quick Ratio 1.5
Current Liabilities P 120,000
Inventory Turnover (based on cost of sales) 8 times
Gross Profit Margin 40%
Mildred’s net sales for the year were
A. P 800,000
B. P 672,000
C. P 480,000
D. P1,200,000
Solutions:
Inventory balance (120,000 x (2.0- 1.5) P60,000
Cost of Goods sold 60,000 x 8 P480,000

Sales (480,000 ÷ 0.60) P800,000

17. The following data were obtained from the records of Cape Company for the year ended and
as December 31,2010:
Current Ratio (at year end) 1.5 to 1
Inventory turnover based on sales and ending inventory 15 times
Inventory turnover based on cost of goods sold 10.5 times
and ending inventory
Gross Margin for 2010 P 360,000
What was Cape Company's December 31, 2010 balance in the Inventory
account?
A. P120,000
B. P 54,000
C. P 80,000
D. P 95,000
Solutions:

18. Selected information from the accounting records of the Cruise Company is as follows:
Net A/R at December 31, 2009 P900,000
Net A/R at December 31, 2010 P1,000,000
 Accounts receivable turnover 5 to 1
Inventories at December 31, 2009 P1,100,000
Inventories at December 31, 2010 P1,200,000
Inventory turnover 4 to 1
What was the gross margin for 2010?
A. P150,000
B. P200,000
C. P300,000
D. P400,000
Solutions:

19. Net sales are P6,000,000, beginning coral assets are P2,800,000, and the assets turnover is
3.0. What is the ending total asset balance?
A. P2,000,000.
B. P1,200,000,
C. P2,800,000.
D. P1,600,000.
Solutions:
Average total assets (6M ÷ 3.0) P2,000,000
Ending total assets: (2 x P2M) - P2.8M P1,200,000
20. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a
book value of equity of P3,000,000, and a market/book ratio of 3.5?
A. P8.57
В. P30.00
С. P85.70
D. P105.00
Solution:
Market Value Equity (3M x 3.5) P10,500,000
Market price per share (10.5M ÷ 100,000) P105.00
21. Assume you are given the following relationships for the Camp Company:
Sales/total assets 1.5%
Return on assets (ROA) 3%
Return on' equity (ROE) 5%
The Camp Company's debt ratio is
A. 40%
B. 60%
C. 35%
D. 65%
Solution:
1- (0.03 ÷ 0.05) = 40%
22. Crayon Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio
of 75%. The dividend yield is
A. 25.0%
B. - 22.0%
C. 7.5%
D. 10.0%
Solutions:
Dividend per share: 0.75 x 2.20 P1.65
 Market Price: 10 x 2.20 22.00

Dividend yield: P1.65÷22.00 7.5%

23. The times interest earned ratio of Creek Company is 4.5 times. The interest expense for the
year was P20,000, and the company's tax rate is 40%. The company's net income is:
A. P22,000
B. P42,000
C. P54,000.
D. P66,000
Solutions:
Earnings before interest expense (20,000 x 4.5) P90,000
Deduct interest expense 20,000
Income before income tax P70,000
Deduct income tax (70,000 x 0.4) 28,000
Net Income P42,000
24. The following were reflected from the records of Centennial Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2010
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
The dividend yield ratio is
A. 0.50
 B. 0.12
C. 0.40
D. 0.08
Solution:
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 16,000

Dividend per share 400,000 x 0.40 ÷ 25,000 6.40

The dividend is calculated by dividing the dividend per share by the market price per share.
The market price is computed by multiplying the earnings per share by the price earnings
ratio.

Dividend yield 6.4 ÷ (16 x 5) 8.0%

25. CEE Corporation's stockholders' equity at December 31, 2010 consists of the following:
6% cumulative preferred stock, P100 par,
liquidating value was P110 per share;
issued and outstanding 50,000 shares P 5,000,000
Common stock, par, PS per share;
issued and outstanding, 400,000 shares 2,000,0000
Retained earnings 1,000,000
Total P8,000,000
Dividends on preferred stock have been paid through 2009.
At December 31, 2010, CEE Corporation's book value per share was
A. P5.50
B. P6.25
C. P6.75
D. P7.50
Solutions:

26. House of Contratista Company had the following financial statistics for 2010:
Long-term debt (average rate of interest is 8%) P400,000
Interest expense 35,000
Net income 48,000
Income tax 46,000
Operating income 107,000

What was the times-interest earned for 2010?

A. 11.4 times
 B. 3.3 times
C. 3.1 times
D. 3.7 times
Solution:

27. Club Manufacturing reports the following capital structure:

Current liabilities P100,000
Long-term debt 400,000
Deferred income taxes 10,000
Preferred stock 80,000
Common stock 100,000
Premium on common stock 180,000
Retained earnings 170,000
What is the debt ratio?
A. 0.48
B. 0.49
C. 0.93
D. 0.96
Solution:
28. A suminarized income statement for Colt Company is presented below.
Sales P1,000,000
Cost of Sales 600,000
Gross Profit 400,000
Operating expenses 250,000
Operating Income 150,000
Interest Expense 30,000
Earnings before tax 120,000
Income Tax 40,000
Net Income P 80,000

The degree of financial leverage is:

A. P 150,000 ÷ P 30,000.
B. P 150,000 ÷ P120,000
C. P1,000,000 ÷ P400,000
D. P 150,000 ÷ P 80,000
Solution:

29. The following data were gathered from the annual report of Calendar Products.
Market price per share P30.00
Number of common shares 10,000
Preferred stock, 5% P100 par 10,000
Common Equity P140,000
The book value per share is:
A. P30.00
В. P15.00
C. P14.00
D. P13.75
Solution:

Use the following information for question Nos. 30 and 31:

Cherry Corporation had net income of P200,000 and paid dividends to common stockholders of
P40,000 in 2010. The weighted-average number of shares outstanding in 2010 was 50,000
shares. Cherry Corporation’s common stock is selling for P60 per share in the local stock
exchange.
30. Cherry Corporation’s price-earning ratio is
A. 3.8 times
B. 15 times
C. 18.8 times
D. 6 times
Solutions:

31. Cherry Corporation's payout ratio for 2010 is

A. P4 per share
B. 12.5 percent
C. 20.0 percent
D. 25.0 percent
Solutions:
Pay out ratio: dividend ÷ income to common
P40,000 ÷ 20,000 20.0%

32. Creed Company reported the following on its income statement:

Income before taxes P400,000
Income tax expense 100,000
Net income P300,000
An analysis of the income statement revealed that interest expense was P100,000. Creed
Company's times interest earned (TIE) was
A. 5 times
B. 4 times
C. 3.5 times
D. 3 times
Solution:

33. The balance sheet and income statement data for Candle Factory indicate the
following:
Bonds payable, 10% (issued 1998 due 2022) P1,000,000
Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
Income before income tax for year 350,000
Income tax for year 80,000
Common dividends paid 50,000
Preferred dividends paid 15,000
Based on the data presented above, what is the number of times bond interest-charges were
earned?
A. 3.7
B. 4.4
C. 4.5
D. 3.5
Solution:

34. The following data were abstracted from the records of Crimson Corporation for the year
ended June 30, 2010:
Sales P1,800,000
Bond interest expense 60,000
Income taxes 300,000
Net income: 400,000
How many times was bond interest earned?
A. 7.67
B. 11.67
C. 12.67
D. 13.67
Solution:
35. Selected information for Creeme Company as of December 31 is as follows:
2009 2010
Preferred stock, 8% par 100,
nonconvertible, noncumulative P250,000 250,000
Common stock 600,000 800,000
Retained earnings 150,000 370,000
Dividends paid on preferred stock for the year 20,000 20,000
Net income for the year 120,000 240,000
Creeme's return on common stockholders' equity, rounded to the nearest percentage point, for
2010 is
A. 17%
B. 19%
C. 21%
D. 23%
Solution:

36. Chard Company's capital stock at December 31 consisted of the following:

Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding.
10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares authorized,
issued, and outstanding.
Chard's common stock, which is listed on a major stock exchange, was quoted at P4 per share on
December 31. Chard's net income for the year ended December 31 was P60,000. The yearly
preferred dividend was declared. No capital stock transactions occurred. What was the price
earnings ratio on Chard’s common stock at December 31?
A. 6 to 1
B. 8 to 1
C.10 to 1
D.16 to 1
Solution:

37. Selected financial data of Chiller Corporation for the year ended December 31, 2010, is
presented below:
Operating Income P900,000
Interest Expense (100,000)
Income before income taxes 800,000
Income tax (320,000)
Net Income 480,000
Preferred stock dividends (200,000)
Net income available to common stockholders 280,000
Common stock dividends were P120,000. The payout ratio is:
 A. 42.9 percent
B. 66.7 percent
C. 25.0 percent
D. 71.4 percent
Solution:
Pay out ratio: Common Dividend ÷ Income available to common
P120,000 ÷ P280,000 42.9%
38. On December 31. 2009 and 2010, Chancellor Corporation had 100,000 shares of common
stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and
outstanding.
Additional information:
Stockholders equity at 12/31/10 4,500,000
Net income year ended 12/31/10 1,200,000
Dividends on preferred stock year ended 12/31/10 300,000
Market, price per share of common stock at 12/31/10 144
The price-earnings ratio on common stock at December 31, 2010, was
A. 10 to 1
B.12 to 1
C.14 to 1
D. 16 to 1
Solution:
EPS: (P1,200,000- P 300,000) ÷ 100 P9.00
P/E ratio: 144 ÷ 9 16
39. The balance sheets of Character Company at the end of each of the first two years of
operations indicate the following:
2010 2009
Total Current assets P600,000 P560,000
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 common stock 60,000 60,000
Retained earnings 300,000 210,000
Net income is P115,000 and interest expense is P30,000 for 2010.
What is the rate earned on total assets for 2010?
A. 9:3 percent
B. 10.1 percent
C. 8.9 percent
D. 7.4 percent
Solution:

40. What is the rate earned on stockholders' equity for 2010?

A. 10.6 percent
B. 11.3 percent
 C. 12.4 percent
D. 15.6 percent
Solution:

41. What is the earnings per share on common stock for 2010?
A. 1.92
B. P1.89
C. P1.77
D. P1.42
Solution:
42. If the marker price is P30, what is the price-earnings ratio on common stock for
2010?
A. 17.0
B. 12.1
C. 12.4
D. 15.9
Solution:

43. The following information is available for Celebes Company for 2010:
Dividends per share of common stock P1.40
Market price per share of common stock 17.50
Which of the following statements is correct?
A. The dividend yield is 8.0%, which is of interest to investors seeking an
increase in market price of their stocks.
 B. The dividend yield is 8.0%, which is of special interest to investors seeking current
returns on their investments.
C. The dividend yield is 12.5%, which is of interest to bondholders.
D. The dividend yield is 8.0 times the market price, which is important in solvency
analysis.
Solution:

44. Using the following data, prepare an analysis of changes in gross profit for Cloud Company.
2011 2010
Net sales P5,250,000 P4,000,000
Cost of goods sold 3,795,000 3,000,000
Gross profit P1,725,000 P1,000,000

The selling price increased by 20 percent effective January 1, 2011.

How much were the changes in sales due to change in unit selling price and cost of goods sold
due to change in quantity sold, respectively?
A. P264,000 increase; P450,000 decrease
B. P264,000 decrease; P450,000 increase
C. P280,000 increase; P345,000 increase
D. P280,000 decrease; P345,000 decrease
Solution:

45. The gross profit of Care Company for each of the years ended December 31, 2011 and 2010
follows:
2011 2010
Sales P1,584,000 P1,600,000
Cost of good sold 928,000 960,000
Gross profit P656,000 P640,000
Assuming that 2011 selling prices were 10% lower, how did the amounts in sales and cost of
goods sold change due to change in unit selling price and unit cost, respectively?
A. P176,000 decrease; P128,000 decrease
B. P176,000 increase; P128,000 increase
C. P160,000 increase; P96,000 increase
D. P160,000 decrease; P96,000 decrease
Solution: