Financial Statement Analysis

A. Absolute numbers would be most meaningful for both the large and small firm.
FINANCIAL STATEMENT ANALYSIS B. Absolute numbers would be most meaningful in the large firm; relative numbers would
be most meaningful in the small firm.
THEORIES: C. Relative numbers would be most meaningful for the large firm; absolute numbers would
6. Management is a user of financial analysis. Which of the following comments does not represent a be most meaningful for the small firm.
fair statement as to the management perspective? D. Relative numbers would be most meaningful for both the large and small firm,
A. Management is always interested in maximum profitability. especially for interfirm comparisons.
B. Management is interested in the view of investors.
C. Management is interested in the financial structure of the entity. 4. Which of these statements is false?
D. Management is interested in the asset structure of the entity. 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.
Limitations C. The analysis of an entity's financial statements can be more meaningful if the results
1. A limitation in calculating ratios in financial statement analysis is that are compared with industry averages and with results of competitors.
A. it requires a calculator. D. A company comparison should not be made with industry averages if the company
B. no one other than the management would be interested in them. does not clearly fit into any one industry.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company. Common-sized financial statements
9. Which of the following generally is the most useful in analyzing companies of different sizes?
2. Which of the following is not a limitation of financial statement analysis? A. comparative statements C. price-level accounting
A. The cost basis. C. The diversification of firms. B. common-sized financial statements D. profitability index
B. The use of estimates. D. The availability of information.
12. Statements in which all items are expressed only in relative terms (percentages of a base)
5. Which of the following does not represent a problem with financial analysis? are termed:
A. Financial statement analysis is an art; it requires judgment decisions on the part of the analyst. A. Vertical statements C. Funds Statements
B. Financial analysis can be used to detect apparent liquidity problems. B. Horizontal Statements D. Common-Size Statements
C. There are as many ratios for financial analysis as there are pairs of figures.
D. Some industry ratio formulas vary from source to source. 10. The percent of property, plant and equipment to total assets is an example of:
A. vertical analysis C. profitability analysis
77. The use of alternative accounting methods: B. solvency analysis D. horizontal analysis
A. is not a problem in ratio analysis because the footnotes disclose the method used.
B. may be a problem in ratio analysis even if disclosed. 15. Vertical analysis is a technique that expresses each item in a financial statement
C. is not a problem in ratio analysis since eventually all methods will lead to the same end. A. in pesos and centavos.
D. is only a problem in ratio analysis with respect to inventory. B. as a percent of the item in the previous year.
C. as a percent of a base amount.
Industry Analysis D. starting with the highest value down to the lowest value.
3. 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? 17. In performing a vertical analysis, the base for prepaid expenses is
 Financial Statement Analysis

A. total current assets. C. total liabilities. A. common stockholders C. preferred shareholders

B. total assets. D. prepaid expenses in a previous year. B. general creditors such as banks D. bondholders

Horizontal analysis Measures of Risk

8. The percentage analysis of increases and decreases in individual items in comparative financial 54. The following groups of ratios primarily measure risk:
statements is called: A. liquidity, activity, and common equity C. liquidity, activity, and debt
A. vertical analysis C. profitability analysis B. liquidity, activity, and profitability D. activity, debt, and profitability
B. solvency analysis D. horizontal analysis
Financial ratios
11. Horizontal analysis is also known as 7. Ratios are used as tools in financial analysis
A. linear analysis. C. trend analysis. A. instead of horizontal and vertical analyses.
B. vertical analysis. D. common size analysis. B. because they can provide information that may not be apparent from inspection of the
individual components of a particular ratio.
13. In which of the following cases may a percentage change be computed? C. because even single ratios by themselves are quite meaningful.
A. The trend of the amounts is decreasing but all amounts are positive. D. because they are prescribed by GAAP.
B. 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. 18. In the near term, the important ratios that provide the information critical to the short-run
D. There is a negative amount in the base year and a positive amount in the subsequent year. operation of the firm are:
A. liquidity, activity, and profitability C. liquidity, activity, and equity
14. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of B. liquidity, activity, and debt D. activity,debt, and profitability
time
A. that has been arranged from the highest number to the lowest number. 75. The ability of a business to pay its debts as they come due and to earn a reasonable amount
B. that has been arranged from the lowest number to the highest number. of income is referred to as:
C. to determine which items are in error. A. solvency and leverage C. solvency and liquidity
D. to determine the amount and/or percentage increase or decrease that has taken place. B. solvency and profitability D. solvency and equity

Trend analysis Liquidity ratios

16. Trend analysis allows a firm to compare its performance to: Interested parties
A. other firms in the industry C. other industries 19. The primary concern of short-term creditors when assessing the strength of a firm is the
B. other time periods within the firm D. none of the above entitys
A. short-term liquidity C. market price of stock
Risk and return B. profitability D. leverage
29. The present and prospective stockholders are primarily concerned with a firm
A. profitability C. leverage 35. Short-term creditors are usually most interested in assessing
B. liquidity D. risk and return A. solvency. C. marketability.
B. liquidity. D. profitability.
69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest return?
 Financial Statement Analysis

36. The two categories of ratios that should be utilized to asses a firms true liquidity are the A. accounts receivable turnover. C. acid test ratio.
A. current and quick ratios C. liquidity and profitability ratios B. asset turnover. D. current ratio.
B. liquidity and debt ratios D. liquidity and activity ratios
Current ratio
47. Which of the following is the most of interest to a firms suppliers? 24. Typically, which of the following would be considered to be the most indicative of a firm's
A. profitability C. asset utilization short-term debt paying ability?
B. debt D. liquidity A. working capital C. acid test ratio
B. current ratio D. days sales in receivables
Measures of liquidity
21. The ratios that are used to determine a companys short-term debt paying ability are 22. The current ratio is
A. asset turnover, times interest earned, current ratio, and receivables turnover. A. calculated by dividing current liabilities by current assets.
B. times interest earned, inventory turnover, current ratio, and receivables turnover. B. used to evaluate a companys liquidity and short-term debt paying ability.
C. times interest earned, acid-test ratio, current ratio, and inventory turnover. C. used to evaluate a companys solvency and long-term debt paying ability.
D. current ratio, acid-test ratio, receivables turnover, and inventory turnover. D. calculated by subtracting current liabilities from current assets.

20. Which of the following is a measure of the liquidity position of a corporation? 30. Which of the following ratios is rated to be a primary measure of liquidity and considered of
A. earnings per share highest significance rating of the liquidity ratios a bank analyst?
B. inventory turnover A. Debt/Equity
C. current ratio B. Current ratio
D. number of times interest charges earned C. Degree of Financial Leverage
D. Accounts Receivable Turnover in Days
37. Which one of the following ratios would not likely be used by a short-term creditor in evaluating
whether to sell on credit to a company? 41. A weakness of the current ratio is
A. Current ratio C. Asset turnover A. the difficulty of the calculation.
B. Acid-test ratio D. Receivables turnover B. that it does not take into account the composition of the current assets.
C. that it is rarely used by sophisticated analysts.
51. Which of the following ratios would be least helpful in appraising the liquidity of current assets? D. that it can be expressed as a percentage, as a rate, or as a proportion.
A. Accounts Receivable turnover C. Current Ratio
B. Days sales in inventory D. Days sales in accounts receivable Acid-test or quick ratio
42. A measure of a companys immediate short-term liquidity is the
53. Which ratio is most helpful in appraising the liquidity of current assets? A. current ratio.
A. current ratio C. acid-test ratio B. current cash debt coverage ratio.
B. debt ratio D. accounts receivable turnover C. cash debt coverage ratio.
D. acid-test ratio.
Not a measure of liquidity
79. Which one of the following ratios would not likely be used by a short-term creditor in evaluating 23. The acid-test or quick ratio
whether to sell on credit to a company? A. is used to quickly determine a companys solvency and long-term debt paying ability.
 Financial Statement Analysis

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. 66. Total asset turnover measures the ability of a firm to:
D. is the same as the current ratio except it is rounded to the nearest whole percent. A. generate profits on sales
B. generate sales through the use of assets
Not a liquidity ratio C. cover long-term debt
28. Which one of the following would not be considered a liquidity ratio? D. buy new assets
A. Current ratio. C. Quick ratio.
B. Inventory turnover. D. Return on assets. 76. A measure of how efficiently a company uses its assets to generate sales is the
A. asset turnover ratio. C. profit margin ratio.
Activity ratios B. cash return on sales ratio. D. return on assets ratio.
Days receivable & receivable turnover
Quality of receivables Solvency ratios
25. Which of the following does not bear on the quality of receivables? Interested parties
A. shortening the credit terms 50. Long-term creditors are usually most interested in evaluating
B. lengthening the credit terms A. liquidity. C. profitability.
C. lengthening the outstanding period B. marketability. D. solvency.
D. all of the above bear on the quality of receivables
Financial Leverage
Days receivable 45. Trading on the equity (leverage) refers to the
27. A general rule to use in assessing the average collection period is A. amount of working capital.
A. that is should not exceed 30 days. B. amount of capital provided by owners.
B. it can be any length as long as the customer continues to buy merchandise. C. use of borrowed money to increase the return to owners.
C. that it should not greatly exceed the discount period. D. earnings per share.
D. that it should not greatly exceed the credit term period.
90. The tendency of the rate earned on stockholders' equity to vary disproportionately from the
Asset utilization ratios rate earned on total assets is sometimes referred to as:
Performance measures A. leverage C. yield
65. All of the following are asset utilization ratios except: B. solvency D. quick assets
A. average collection period C. receivables turnover
B. inventory turnover D. return on assets 55. Using financial leverage is a good financial strategy from the viewpoint of stockholders of
companies having:
Asset turnover A. a high debt ratio C. a steadily declining current ratio
63. Asset turnover measures B. steady or rising profits D. cyclical highs and lows
A. how often a company replaces its assets.
B. how efficiently a company uses its assets to generate sales. 46. The ratio that indicates a companys degree of financial leverage is the
C. the portion of the assets that have been financed by creditors. A. cash debt coverage ratio. C. free cash flow ratio.
D. the overall rate of return on assets. B. debt to total assets. D. times-interest earned ratio.
 Financial Statement Analysis

C. the proportion of interest paid relative to dividends paid.

73. Interest expense creates magnification of earnings through financial leverage because: D. the percentage of the total assets provided by creditor.
A. while earnings available to pay interest rise, earnings to residual owners rise faster
B. interest accompanies debt financing Debt-to-equity ratio
C. interest costs are cheaper than the required rate of return to equity owners 60. Which of the following statements best compares long-term borrowing capacity ratios?
S. the use of interest causes higher earnings A. The debt/equity ratio is more conservative than the debt ratio.
B. The debt to tangible net worth ratio is more conservative than the debt/equity ratio.
Measures of solvency C. The debt/equity ratio is more conservative than the debt to tangible net worth ratio.
34. The set of ratios that is most useful in evaluating solvency is D. The debt ratio is more conservative than the debt/equity ratio.
A. debt ratio, current ratio, and times interest earned
B. debt ratio, times interest earned, and return on assets Times interest earned
C. debt ratio, times interest earned, and quick ratio 74. A times interest earned ratio of 0.90 to 1 means that
D. debt ratio, times interest earned, and cash flow to debt A. the firm will default on its interest payment
B. net income is less than the interest expense
49. Which of the following ratios is most relevant to evaluating solvency? C. the cash flow is less than the net income
A. Return on assets C. Days purchases in accounts payable D. the cash flow exceeds the net income
B. Debt ratio D. Dividend yield
Fixed charge coverage
Fixed assets to long-term liabilities 61. A fixed charge coverage:
44. Which of the following ratios provides a solvency measure that shows the margin of safety of A. is a balance sheet indication of debt carrying ability
noteholders or bondholders and also gives an indication of the potential ability of the business to B. is an income statement indication of debt carrying ability
borrow additional funds on a long-term basis? C. frequently includes research and development
A. ratio of fixed assets to long-term liabilities D. computation is standard from firm to firm
B. ratio of net sales to assets
C. number of days' sales in receivables Off-balance sheet liabilities
D. rate earned on stockholders' equity 62. If a firm has substantial capital or financing leases disclosed in the notes but not capitalized
in the financial statements, then the
Debt ratio A. times interest earned ratio will be overstated, based upon the financial statements
59. The debt ratio indicates: B. debt ratio will be understated
A. a comparison of liabilities with total assets C. working capital will be understated
B. the ability of the firm to pay its current obligations D. fixed charge ratio will be overstated, based upon the financial statements
C. the efficiency of the use of total assets
D. the magnification of earnings caused by leverage Profitability ratios
Interested parties
78. The debt to total assets ratio measures 39. The return on assets ratio is affected by the
A. the companys profitability. A. asset turnover ratio.
B. whether interest can be paid on debt in the current year. B. debt to total assets ratio.
 Financial Statement Analysis

C. profit margin ratio. 58. Which of the following ratios usually reflects investors opinions of the future prospects for
D. asset turnover and profit margin ratios. the firm?
A. dividend yield C. book value per share
52. Stockholders are most interested in evaluating B. price/earnings ratio D. earnings per share
A. liquidity. C. profitability.
B. solvency. D. marketability. Dividend yield
57. Which of the following ratios represents dividends per common share in relation to market
Performance measures price per common share?
48. The set of ratios that are most useful in evaluating profitability is A. dividend payout C. price/earnings
A. ROA, ROE, and debt to equity ratio C. ROA, ROE, and acid-test ratio B. dividend yield D. book value per share
B. ROA, ROE, and dividend yield D. ROA, ROE, and cash flow to debt
Financial Statement Analysis
Earnings per share Accounts Receivable
82. Which of the following ratios appears most frequently in annual reports? 26. Which of the following reasons should not be considered in order to explain why the
A. Earnings per Share C. Profit Margin receivables appear to be abnormally high?
B. Return on Equity D. Debt/Equity A. Sales volume decreases materially late in the year.
B. Receivables have collectibility problems and possibly some should have been written
Return on assets off.
64. Return on assets C. Material amount of receivables are on the installment basis.
A. can be determined by looking at a balance sheet D. Sales volume expanded materially late in the year.
B. should be smaller than return on sales
C. can be affected by the companys choice of a depreciation method 31. An acceleration in the collection of receivables will tend to cause the accounts receivable
D. should be larger than return on equity 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 suppliers of funds Inventories
B. return to all long-term creditors D. return to stockholders 32. Which of the following would best indicate that the firm is carrying 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 higher current ratio, an
C. relates price to dividends average quick ratio, and a low inventory turnover. What might you assume about Tri-C?
D. relates A. Its cash balance is too low. C. Its current liabilities are too low.
B. Its cost of goods sold is too low. D. Its average inventory is too high.
 Financial Statement Analysis

D. Company A has a lower debt ratio than company B

Current ratio
33. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0? Sensitivity Analysis
A. Buy raw materials on credit Current ratio
B. Sell marketable securities at cost 40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, this firm should
C. Pay off accounts payable with cash A. improve its collection practices, thereby increasing cash and increasing its current
D. Pay off a portion of long-term debt with cash and quick ratios.
B. improve its collection practices and pay accounts payable, there decreasing current
Fixed asset turnover ratio liabilities and increasing the current and quick ratios.
68. Which of the following circumstances will cause sales to fixed assets to be abnormally high? C. decrease current liabilities by utilizing more long-term debt, thereby increasing the
A. A labor-intensive industry. current and quick ratios.
B. The use of units-of-production depreciation. D. increase inventory, thereby increasing current assets and the current and quick
C. A highly mechanized facility. ratios.
D. High direct labor costs from a new union contract.
43. Recently the M&M Company has been having problems. As a result, its financial situation
Total asset turnover has deteriorated. M&M approached the First National Bank for a badly needed loan, but the
81. A firm with a total asset turnover lower than the industry standard and a current ratio which meets loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the
industry standard might have excessive: bank would even consider granting the credit. Which of the following actions would do the
A. Accounts receivable C. Debt most to improve the ratio in the short run?
B. Fixed assets D. Inventory A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable.
Profitability analysis C. Paying off some long-term debt.
84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of D. Purchasing additional inventory on credit (accounts payable).
P2,500,000. Which of the following best compares the profitability of Denver and Oakland?
A. Oakland Enterprises is 25% more profitable than Denver Dynamics. 87. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison can't be borrowing P60,000 from the bank with a 3-month note payable. What effect did the
quantified. borrowing transaction have on Tyner Company's current ratio?
C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics. A. The ratio remained unchanged.
D. Further information is needed for a reasonable comparison. B. The change in the current ratio cannot be determined.
C. The ratio decreased.
Debt ratio D. The ratio increased.
86. 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 88. Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
and taxes and the same total assets. Based on this information we could conclude that A. Convert marketable securities to cash.
A. Company A has higher net income than Company B B. Pay accounts payable with cash.
B. Company A has a lower return on assets than company B C. Buy inventory with short term credit (i.e. accounts payable).
C. Company A is more risky than Company B. D. Sell inventory at cost.
 Financial Statement Analysis

DuPont Analysis
Acid-test ratio 71. Which of the following could cause return on assets to decline when net profit margin is
38. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by increasing?
short-term debt and collection of accounts receivable have on the ratio? A. sale of investments at year-end C. purchase of a new building at year-end
A. B. C. D. B. increased turnover of operating assets D. a stock split
Short-term borrowing Increase Increase Decrease Decrease
Collection of receivable No effect Increase No effect Decrease 80. A firm with a lower net profit margin can improve its return on total assets by
A. increasing its debt ratio C. increasing its total asset turnover
Profit margin B. decreasing its fixed assets turnover D. decreasing its total asset turnover
70. Which of the following would most likely cause a rise in net profit margin?
A. increased sales C. decreased operating expenses
B. decreased preferred dividends D. increased cost of sales PROBLEMS:
Horizontal analysis
Return on assets i. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements
67. Return on assets cannot fall under which of the following circumstances? as the base data, net income decreased by 70 percent in 2007 and increased by 175
A. B. C. D. percent in 2008. The respective net income reported by Kline Corporation for 2007 and
2008 are:
Net profit margin Decline Rise Rise Decline
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000
Total asset turnover Rise Decline Rise Decline
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000
Debt ratio ii. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000
83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor, has in 2007. The increase in net income of P300,000:
long-term debt of P200,000. Which of the following statements best represents an analysis of the A. can be stated as 0% C. cannot be stated as a percentage
long-term debt position of these two firms? B. can be stated as 100% increase D. can be stated as 200% increase
A. Jones obviously has too much debt when compared to its competitor.
B. Smith Company's times interest earned should be lower than Jones. Liquidity ratios
C. Smith has five times better long-term borrowing ability than Jones. iii. The following financial data have been taken from the records of Ratio Company:
D. Not enough information to determine if any of the answers are correct. Accounts receivable P200,000
Accounts payable 80,000
Times interest earned Bonds payable, due in 10 years 500,000
85. Which of the following will not cause times interest earned to drop? Assume no other changes than Cash 100,000
those listed. Interest payable, due in three months 25,000
A. A rise in preferred stock dividends. Inventory 440,000
B. A drop in sales with no change in interest expense. Land 800,000
C. An increase in interest rates. Notes payable, due in six months 250,000
D. An increase in bonds payable with no change in operating income. What will happen to the ratios below if Ratio Company uses cash to pay 50 percent of its
accounts payable?
 Financial Statement Analysis

A. B. C. D. viii. Milward Corporations books disclosed the following information for the year ended
Current ratio Increase Decrease Increase Decrease December 31, 2007:
Acid-test ratio Increase Decrease Decrease Increase Net credit sales P1,500,000
Net cash sales 240,000
Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at Accounts receivable at beginning of year 200,000
the end of the current year: Accounts receivable at end of year 400,000
Accounts payable P145,000 Milwards accounts receivable turnover is
Accounts receivable 110,000 A. 3.75 times C. 5.00 times
Accrued liabilities 4,000 B. 4.35 times D. 5.80 times
Cash 80,000
Income tax payable 10,000 Days receivable
Inventory 140,000 ix. Batik Clothing Store had a balance in the Accounts Receivable account of P390,000 at the
Marketable securities 250,000 beginning of the year and a balance of P410,000 at the end of the year. The net credit
Notes payable, short-term 85,000 sales during the year amounted to P4,000,000. Using 360-day year, what is the average
Prepaid expenses 15,000 collection period of the receivables?
A. 30 days C. 73 days
iv. The amount of working capital for the company is: B. 65 days D. 36 days-
A. P351,000 C. P211,000
B. P361,000 D. P336,000 Cash collection
x. Deity Company had sales of P30,000, increase in accounts payable of P5,000, decrease in
v. The companys current ratio as of the balance sheet date is: accounts receivable of P1,000, increase in inventories of P4,000, and depreciation expense
A. 2.67:1 C. 2.02:1 of P4,000. What was the cash collected from customers?
B. 2.44:1 D. 1.95:1 A. P31,000 C. P34,000
B. P35,000 D. P25,000
vi. The companys acid-test ratio as of the balance sheet date is:
A. 1.80:1 C. 2.02:1 Inventory turnover
B. 2.40:1 D. 1.76:1 xi. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold
for 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000.
Activity ratios What was the inventory turnover for 2007?
Receivables turnover A. 6.4 C. 5.3
vii. Pine Hardware Store had net credit sales of P6,500,000 and cost of goods sold of P5,000,000 for B. 6.0 D. 5.0
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 xii. Selected information from the accounting records of Petals Company is as follows:
A. 7.7 times. C. 9.3 times. Net sales for 2007 P900,000
B. 10.8 times. D. 10.0 times. Cost of goods sold for 2007 600,000
Inventory at December 31, 2006 180,000
Inventory at December 31, 2007 156,000
 Financial Statement Analysis

Petals inventory turnover for 2007 is Asset

A. 5.77 times C. 3.67 times xvi. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover
B. 3.85 times D. 3.57 times is 3.0. What is the ending total asset balance?
A. P2,000,000. C. P2,800,000.
xiii. The Moss Company presents the following data for 2007. B. P1,200,000. D. P1,600,000.
Net Sales, 2007 P3,007,124
Net Sales, 2006 P 930,247 Solvency ratios
Cost of Goods Sold, 2007 P2,000,326 Debt ratio
Cost of Goods Sold, 2007 P1,000,120 xvii. Jordan Manufacturing reports the following capital structure:
Inventory, beginning of 2007 P 341,169 Current liabilities P100,000
Inventory, end of 2007 P 376,526 Long-term debt 400,000
The merchandise inventory turnover for 2007 is: Deferred income taxes 10,000
A. 5.6 C. 7.5 Preferred stock 80,000
B. 15.6 D. 7.7 Common stock 100,000
Premium on common stock 180,000
xiv. Based on the following data for the current year, what is the inventory turnover? Retained earnings 170,000
Net sales on account during year P 500,000 What is the debt ratio?
Cost of merchandise sold during year 330,000 A. 0.48 C. 0.93
Accounts receivable, beginning of year 45,000 B. 0.49 D. 0.96
Accounts receivable, end of year 35,000
Inventory, beginning of year 90,000 Times interest earned
Inventory, end of year 110,000 xviii.House of Fashion Company had the following financial statistics for 2006:
A. 3.3 C. 3.7 Long-term debt (average rate of interest is 8%) P400,000
B. 8.3 D. 3.0 Interest expense 35,000
Net income 48,000
Days inventory Income tax 46,000
xv. Selected information from the accounting records of Eternity Manufacturing Company follows: Operating income 107,000
Net sales P3,600,000 What is the times interest earned for 2006?
Cost of goods sold 2,400,000 A. 11.4 times C. 3.1 times
Inventories at January 1 672,000 B. 3.3 times D. 3.7 times
Inventories at December 31 576,000
What is the number of days sales in average inventories for the year? xix. Brava Company reported the following on its income statement:
A. 102.2 C. 87.6 Income before taxes P400,000
B. 94.9 D. 68.1 Income tax expense 100,000
Net income P300,000
Turnover ratios An analysis of the income statement revealed that interest expense was P100,000. Brava
Asset turnover Companys times interest earned (TIE) was
 Financial Statement Analysis

A. 5 times C. 3.5 times Preferred stock, 8%, par P100, nonconvertible, P250,000 P250,000
B. 4 times D. 3 times noncumulative
Common stock 600,000 800,000
xx. The balance sheet and income statement data for Candle Factory 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 the year 20,000 20,000
Preferred 5% stock, P100 par (no change during year) 300,000 Net income for the year 120,000 240,000
Common stock, P50 par (no change during year) 2,000,000 Ivanos return on common stockholders equity, rounded to the nearest percentage point,
Income before income tax for year 350,000 for 2007 is
Income tax for year 80,000 A. 17% C. 21%
Common dividends paid 50,000 B. 19% D. 23%
Preferred dividends paid 15,000
Based on the data presented above, what is the number of times bond interest charges were earned Dividend yield
(round to one decimal point)? xxiv. The following information is available for Duncan Co.:
A. 3.7 C. 4.5 2006
B. 4.4 D. 3.5 Dividends per share of common stock P 1.40
Market price per share of common stock 17.50
xxi. The following data were abstracted from the records of Johnson Corporation for the year: Which of the following statements is correct?
Sales P1,800,000 A. The dividend yield is 8.0%, which is of interest to investors seeking an increase in
Bond interest expense 60,000 market price of their stocks.
Income taxes 300,000 B. The dividend yield is 8.0%, which is of special interest to investors seeking current
Net income 400,000 returns on their investments.
How many times was bond interest earned? C. The dividend yield is 12.5%, which is of interest to bondholders.
A. 7.67 C. 12.67 D. The dividend yield is 8.0 times the market price, which is important in solvency analysis.
B. 11.67 D. 13.67
Market Test Ratios
Net income Market/Book value ratio
xxii. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for the year Price per share
was P20,000, and the companys tax rate is 40%. The companys net income is: xxv. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a
A. P22,000 C. P54,000 book value of equity of P3,000,000, and a market/book ratio of 3.5?
B. P42,000 D. P66,000 A. P8.57 C. P85.70
B. P30.00 D. P105.00
Profitability Ratios
Return on Common Equity P/E ratio
xxiii.Selected information for Ivano Company as of December 31 is as follows: xxvi. Orchard Companys capital stock at December 31 consisted of the following:
2006 2007 Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding.
10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares
 Financial Statement Analysis

authorized, issued, and outstanding. Corporations common stock is selling for P60 per share in the local stock exchange.
Orchards common stock, which is listed on a major stock exchange, was quoted at P4 per share on
December 31. Orchards net income for the year ended December 31 was P50,000. The yearly xxix. Terry Corporations price-earnings ratio is
preferred dividend was declared. No capital stock transactions occurred. What was the price A. 3.8 times C. 18.8 times
earnings ratio on Orchards common stock at December 31? B. 15 times D. 6 times
A. 6 to 1 C. 10 to 1
B. 8 to 1 D. 16 to 1 xxx. Terry Corporations payout ratio for 2007 is
A. P4 per share C. 20.0 percent
xxvii. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock B. 12.5 percent D. 25.0 percent
and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding.
Additional information: DuPont Model
Stockholders equity at 12/31/07 P4,500,000 Debt ratio
Net income year ended 12/31/07 1,200,000 xxxi. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin
Dividends on preferred stock year ended 12/31/07 300,000 and asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the
Market price per share of common stock at 12/31/07 144 total debt ratio increase to achieve 20% ROE?
The price-earnings ratio on common stock at December 31, 2007, was A. Total debt ratio must increase by .5
A. 10 to 1 C. 14 to 1 B. Total debt ratio must increase by 5
B. 12 to 1 D. 16 to 1 C. Total debt ratio must increase by 5%
D. Total debt ratio must increase by 50%
Payout ratio
xxviii. Selected financial data of Alexander Corporation for the year ended December 31, 2007, is xxxii. Assume you are given the following relationships for the Orange Company:
presented below: Sales/total assets 1.5X
Operating income P900,000 Return on assets (ROA) 3%
Interest expense (100,000) Return on equity (ROE) 5%
Income before income taxes 800,000 The Orange Companys debt ratio is
Income tax (320,000) A. 40% C. 35%
Net income 480,000 B. 60% D. 65%
Preferred stock dividend (200,000)
Net income available to common stockholders 280,000 Leverage Ratio
Common stock dividends were P120,000. The payout ratio is: Degree of financial leverage
A. 42.9 percent C. 25.0 percent xxxiii. A summarized income statement for Leveraged Inc. is presented below.
B. 66.7 percent D. 71.4 percent Sales P1,000,000
Cost of Sales 600,000
P/E ratio & Payout ratio Gross Profit P 400,000
Use the following information for question Nos. 33 and 34: Operating Expenses 250,000
Terry Corporation had net income of P200,000 and paid dividends to common stockholders of P40,000 Operating Income P 150,000
in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 shares. Terry Interest Expense 30,000
 Financial Statement Analysis

Earnings Before Tax P 120,000 Working capital P1,120,000

Income Tax 40,000 Current ratio 2.00 to 1
Net Income P 80,000 Quick ratio 1.25 to 1
The degree of financial leverage is: Average Collection period 42 days
A. P 150,000 P 30,000 C. P1,000,000 P400,000 Working days 360
B. P 150,000 P120,000 D. P 150,000 P 80,000 The estimated inventory amount is:
A. 840,000 C. 720,000
Other Ratios B. 600,000 D. 550,000
Book value per share
xxxiv. M Corporations stockholders equity at December 31, 2007 consists of the following: xxxvii. The following data were obtained from the records of Salacot Company:
6% cumulative preferred stock, P100 par, liquidating value Current ratio (at year end) 1.5 to 1
was P110 per share; issued and outstanding 50,000 shares P5,000,000 Inventory turnover based on sales and ending inventory 15 times
Common stock, par, P5 per share; issued and Inventory turnover based on cost of goods sold and ending inventory 10.5 times
outstanding, 400,000 shares 2,000,000 Gross margin for 2007 P360,000
Retained earnings 1,000,000 What was Salacot Companys December 31, 2007 balance in the Inventory account?
Total P8,000,000 A. P120,000 C. P 80,000
Dividends on preferred stock have been paid through 2006. B. P 54,000 D. P 95,000
At December 31, 2007, M Corporations book value per share was
A. P5.50 C. P6.75 Net sales
B. P6.25 D. P7.50 xxxviii. Selected data from Mildred Companys year-end financial statements are presented
below. The difference between average and ending inventory is immaterial.
xxxv. The following data were gathered from the annual report of Desk Products. Current ratio 2.0
Market price per share P30.00 Quick ratio 1.5
Number of common shares 10,000 Current liabilities P120,000
Preferred stock, 5% P100 par P10,000 Inventory turnover (based on cost of sales) 8 times
Common equity P140,000 Gross profit margin 40%
The book value per share is: Mildreds net sales for the year were
A. P30.00 C. P14.00 A. P 800,000 C. P 480,000
B. P15.00 D. P13.75 B. P 672,000 D. P1,200,000

Integrated ratios Gross margin

Liquidity & activity ratios xxxix. Selected information from the accounting records of the Blackwood Co. is as follows:
Inventory Net A/R at December 31, 2006 P 900,000
xxxvi. The current assets of Mayon Enterprise consists of cash, accounts receivable, and inventory. Net A/R at December 31, 2007 P1,000,000
The following information is available: Accounts receivable turnover 5 to 1
Credit sales 75% of total sales Inventories at December 31, 2006 P1,100,000
Inventory turnover 5 times Inventories at December 31, 2007 P1,200,000
 Financial Statement Analysis

Inventory turnover 4 to 1 2007 2006

What was the gross margin for 2007? Total current assets P600,000 P560,000
A. P150,000 C. P300,000 Total investments 60,000 40,000
B. P200,000 D. P400,000 Total property, plant, and equipment 900,000 700,000
Total current liabilities 150,000 80,000
Market Test Ratio Total long-term liabilities 350,000 250,000
Dividend yield Preferred 9% stock, P100 par 100,000 100,000
xl. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay out ratio of Common stock, P10 par 600,000 600,000
75%. The dividend yield is Paid-in capital in excess of par-common stock 60,000 60,000
A. 25.0% C. 7.5% Retained earnings 300,000 210,000
B. 22.0% D. 10.0% 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)?
xli. The following were reflected from the records of Salvacion Company: A. 9.3 percent C. 8.9 percent
Earnings before interest and taxes P1,250,000 B. 10.1 percent D. 7.4 percent
Interest expense 250,000
Preferred dividends 200,000 xliii. What is the rate earned on stockholders' equity for 2007 (round percent to one decimal
Payout ratio 40 percent point)?
Shares outstanding throughout 2006 A. 10.6 percent C. 12.4 percent
Preferred 20,000 B. 11.2 percent D. 15.6 percent
Common 25,000
Income tax rate 40 percent xliv. What is the earnings per share on common stock for 2007, (round to two decimal places)?
Price earnings ratio 5 times A. P1.92 C. P1.77
The dividend yield ratio is B. P1.89 D. P1.42
A. 0.50 C. 0.40
B. 0.12 D. 0.08 xlv. If the market price is P30, what is the price-earnings ratio on common stock for 2007 (round
to one decimal point)?
Comprehensive A. 17.0 C. 12.4
xlii. The balance sheets of Magdangal Company at the end of each of the first two years of operations B. 12.1 D. 15.9
indicate the following:
Financial Statement Analysis
Financial Statement Analysis