Professional Documents
Culture Documents
C. trend analysis.
D. common size analysis.
A. profitability
B. liquidity
C. leverage
D. risk and return
69. Which suppliers of funds bear the greatest risk and should therefore earn the greatest
return?
A. common stockholders
C. preferred shareholders
B. general creditors such as banks
D. bondholders
Measures of Risk
54. The following groups of ratios primarily measure risk:
A. liquidity, activity, and common equity
C. liquidity, activity, and debt
B. liquidity, activity, and profitability
D. activity, debt, and profitability
Financial ratios
7. 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 ratios by themselves are quite meaningful.
D. because they are prescribed by GAAP.
18. 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
C. liquidity, activity, and equity
B. liquidity, activity, and debt
D. activity,debt, and profitability
75. 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:
A. solvency and leverage
C. solvency and liquidity
B. solvency and profitability
D. solvency and equity
Liquidity ratios
Interested parties
19. The primary concern of short-term creditors when assessing the strength of a firm is the
entitys
A. short-term liquidity
C. market price of stock
B. profitability
D. leverage
53. Which ratio is most helpful in appraising the liquidity of current assets?
A. current ratio
C. acid-test ratio
B. debt ratio
D. accounts receivable turnover
Not a measure of liquidity
79. 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?
A. accounts receivable turnover.
C. acid test ratio.
B. asset turnover.
D. current ratio.
Current ratio
24. 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
C. acid test ratio
B. current ratio
D. days sales in receivables
22. The current ratio is
A. calculated by dividing current liabilities by current assets.
B. used to evaluate a companys liquidity and short-term debt paying ability.
C. used to evaluate a companys solvency and long-term debt paying ability.
D. calculated by subtracting current liabilities from current assets.
30. 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
41. 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.
Acid-test or quick ratio
Days receivable
27. 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.
Financial Leverage
45. Trading on the 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.
90. 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
55. Using financial leverage is a good financial strategy from the viewpoint of stockholders of
companies having:
A. a high debt ratio
C. a steadily declining current ratio
B. steady or rising profits
D. cyclical highs and lows
46. The ratio that indicates a companys degree of financial leverage is the
A. cash debt coverage ratio.
C. free cash flow ratio.
B. debt to total assets.
D. times-interest earned ratio.
73. Interest expense creates magnification of earnings through financial leverage because:
A. while earnings available to pay interest rise, earnings to residual owners rise faster
B. interest accompanies debt financing
C. interest costs are cheaper than the required rate of return to equity owners
S. the use of interest causes higher earnings
Measures of solvency
34. 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
49. Which of the following ratios is most relevant to evaluating solvency?
A. Return on assets
C. Days purchases in accounts payable
B. Debt ratio
D. Dividend yield
Fixed assets to long-term liabilities
44. Which of the following ratios provides a solvency measure that shows the margin of safety of
noteholders or bondholders and also gives an indication of the potential ability of the business to
borrow additional funds on a long-term basis?
A. ratio of fixed assets to long-term liabilities
B. ratio of net sales to assets
C. number of days' sales in receivables
Return on investments
72. Return on investment measures:
A. return to all suppliers of funds
funds
B. return to all long-term creditors
31. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover
to:
A. decrease
C. either increase or decrease
B. remain the same
D. increase
Inventories
32. 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
89. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average
quick ratio, and a low inventory turnover. What might you assume about Tri-C?
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.
Current ratio
33. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently
2.0?
A. Buy raw materials 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
Fixed asset turnover ratio
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.
Total asset turnover
81. 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
C. Debt
B. Fixed assets
D. Inventory
Profitability analysis
84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises has net income of
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.
B. Oakland Enterprises is more profitable than Denver Dynamics, but the comparison
can't be quantified.
C. Oakland Enterprises is only more profitable if it is smaller than Denver Dynamics.
D. Further information is needed for a reasonable comparison.
Debt ratio
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 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
Sensitivity Analysis
Current ratio
40. 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.
43. Recently the M&M Company has been having problems. As a result, its financial situation
has deteriorated. M&M approached the First National Bank for a badly needed loan, but
the loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank
would even consider granting the credit. Which of the following actions would do the most to
improve the ratio in the short run?
A. Using some cash to pay off some current liabilities.
B. Collecting some of the current accounts receivable.
C. Paying off some long-term debt.
D. Purchasing additional inventory on credit (accounts payable).
87. 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.
88. 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.
Acid-test ratio
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 of accounts receivable have on the ratio?
A.
B.
C.
D.
Short-term borrowing
Increase
Increase
Decrease
Decrease
Collection of receivable
No effect
Increase
No effect
Decrease
Profit margin
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
Return on assets
67. Return on assets cannot fall under which of the following circumstances?
A.
Decline
Rise
B.
Rise
Decline
C.
Rise
Rise
D.
Decline
Decline
Debt ratio
83. Jones Company has long-term debt of P1,000,000, while Smith Company, Jones'
competitor, has long-term debt of P200,000. Which of the following statements best
represents an analysis of the long-term debt position of these two firms?
A. Jones obviously has too much debt when compared to its competitor.
B. Smith Company's times interest earned should be lower than Jones.
C. Smith has five times better long-term borrowing ability than Jones.
D. Not enough information to determine if any of the answers are correct.
Times interest earned
85. Which of the following will not cause times interest earned to drop? Assume no other
changes than those listed.
A. A rise in preferred stock dividends.
B. A drop in sales with no change in interest expense.
C. An increase in interest rates.
D. An increase in bonds payable with no change in operating income.
DuPont Analysis
71. Which of the following could cause return on assets to decline when net profit margin is
increasing?
A. sale of investments at year-end
C. purchase of a new building at yearend
B. increased turnover of operating assets
D. a stock split
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
B. decreasing its fixed assets turnover
D. decreasing its total asset turnover
PROBLEMS:
Horizontal analysis
i
.Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as
the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in 2008.
The respective net income reported by Kline Corporation for 2007 and 2008 are:
A. P 600,000 and P5,500,000
C. P1,400,000 and P3,500,000
B. P5,500,000 and P 600,000
D. P1,400,000 and P5,500,000
ii
.Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net income of P250,000 in 2007.
The increase in net income of P300,000:
A. can be stated as 0%
C. cannot be stated as a percentage
B. can be stated as 100% increase
D. can be stated as 200% increase
Liquidity ratios
iii
.The following financial data have been taken from the records of Ratio Company:
Accounts receivable
P200,000
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 six months
250,000
What will happen to the ratios below if Ratio Company uses cash to pay 50 percent of its
accounts payable?
A.
B.
C.
D.
Current ratio
Increase
Decrease
Increase
Decrease
Acid-test ratio
Increase
Decrease
Decrease
Increase
Question Nos. 4 through 6 are based on the data taken from the balance sheet of Nomad Company at
the end of the current year:
Accounts payable
P145,000
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
15,000
iv
vi
Activity ratios
Receivables turnover
vii
.Pine Hardware Store had net credit sales of P6,500,000 and cost 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.
C. 9.3 times.
B. 10.8 times.
D. 10.0 times.
viii
.Milward Corporations books disclosed the following information for the year ended
December 31, 2007:
Net credit sales
P1,500,000
Net cash sales
240,000
Accounts receivable at beginning of year
200,000
Accounts receivable at end of year
400,000
Milwards accounts receivable turnover is
A. 3.75 times
C. 5.00 times
B. 4.35 times
D. 5.80 times
Days receivable
ix
.Batik 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
B. 15.6
C. 73 days
D. 36 days
xiv
Cash collection
x
.Deity 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
C. P34,000
B. P35,000
D. P25,000
Inventory turnover
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. What was the
inventory turnover for 2007?
A. 6.4
C. 5.3
B. 6.0
D. 5.0
xii
xiii
D. 7.7
P3,007,124
P 930,247
P2,000,326
P1,000,120
P 341,169
P 376,526
.Based on the following data for the current year, what is the inventory turnover?
Net sales on account during year
P 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
C. 3.7
B. 8.3
D. 3.0
Days inventory
xv
.Selected information from the accounting records of Eternity Manufacturing Company
follows:
Net sales
P3,600,000
Cost of goods sold
2,400,000
Inventories at January 1
672,000
Inventories at December 31
576,000
What is the number of days sales in average inventories for the year?
A. 102.2
C. 87.6
B. 94.9
D. 68.1
Turnover ratios
Asset turnover
Asset
xvi
.Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is
3.0. What is the ending total asset balance?
A. P2,000,000.
C. P2,800,000.
B. P1,200,000.
D. P1,600,000.
Solvency ratios
Debt ratio
xvii
.Jordan Manufacturing reports the following capital structure:
Current liabilities
Long-term debt
P100,000
400,000
10,000
80,000
100,000
180,000
170,000
C. 0.93
D. 0.96
xx
P400,000
35,000
48,000
46,000
107,000
.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
.The following data were abstracted from the records of Johnson Corporation for the year:
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
C. 12.67
B. 11.67
D. 13.67
Net income
xxii
.The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for
the year was P20,000, and the companys tax rate is 40%. The companys net income
is:
A. P22,000
C. P54,000
B. P42,000
D. P66,000
Profitability Ratios
Return on Common Equity
xxiii
.Selected information for Ivano Company as of December 31 is as follows:
2006
2007
Preferred stock, 8%, par P100, nonconvertible,
P250,000
P250,000
noncumulative
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
Ivanos return on common stockholders equity, rounded to the nearest percentage point,
for 2007 is
A. 17%
C. 21%
B. 19%
D. 23%
Additional information:
Stockholders equity at 12/31/07
Net income year ended 12/31/07
Dividends on preferred stock year ended 12/31/07
Market price per share of common stock at 12/31/07
The price-earnings ratio on common stock at December 31, 2007, was
A. 10 to 1
C. 14 to 1
B. 12 to 1
D. 16 to 1
Dividend yield
xxiv
.The following information is available for Duncan Co.:
2006
Dividends per share of common stock
P 1.40
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.
Market Test Ratios
Market/Book value ratio
Price per share
xxv
.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
C. P85.70
B. P30.00
D. P105.00
P/E ratio
xxvi
.Orchard Companys 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.
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 preferred dividend was declared. No capital stock transactions occurred. What was the
price earnings ratio on Orchards common stock at December 31?
A. 6 to 1
C. 10 to 1
B. 8 to 1
D. 16 to 1
xxvii
. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock
and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding.
P4,500,000
1,200,000
300,000
144
Payout ratio
xxviii
.Selected financial data of Alexander Corporation for the year ended December 31, 2007,
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 dividend
(200,000)
Net income available to common stockholders
280,000
Common stock dividends were P120,000. The payout ratio is:
A. 42.9 percent
C. 25.0 percent
B. 66.7 percent
D. 71.4 percent
P/E ratio & Payout ratio
Use the following information for question Nos. 33 and 34:
Terry Corporation had net income of P200,000 and paid dividends to common stockholders
of P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was
50,000 shares. Terry Corporations common stock is selling for P60 per share in the local
stock exchange.
xxix
C. 18.8 times
D. 6 times
C. 20.0 percent
xxx
B. 12.5 percent
D. 25.0 percent
DuPont Model
Debt ratio
xxxi
. The Board of Directors is dissatisfied with last year's ROE of 15%. If the profit margin and asset
turnover remain unchanged at 8% and 1.25 respectively, by how much must the total debt ratio
increase to achieve 20% ROE?
A. Total debt ratio must increase by .5
B. Total debt ratio must increase by 5
C. Total debt ratio must increase by 5%
D. Total debt ratio must increase by 50%
xxxii
.Assume you are given the following relationships for the Orange Company:
Sales/total assets
Return on assets (ROA)
Return on equity (ROE)
The Orange Companys debt ratio is
A. 40%
C. 35%
B. 60%
D. 65%
Leverage Ratio
Degree of financial leverage
xxxiii
.A summarized income statement for Leveraged Inc. is presented below.
Sales
Cost of Sales
Gross Profit
Operating Expenses
Operating Income
Interest Expense
Earnings Before Tax
Income Tax
Net Income
The degree of financial leverage is:
A. P 150,000 P 30,000
C. P1,000,000 P400,000
B. P 150,000 P120,000
D. P 150,000 P 80,000
1.5X
3%
5%
P1,000,000
600,000
P 400,000
250,000
P 150,000
30,000
P 120,000
40,000
P 80,000
Other Ratios
Book value per share
xxxiv
.M Corporations stockholders equity at December 31, 2007 consists of the following:
6% cumulative preferred stock, P100 par, liquidating value
was P110 per share; issued and outstanding 50,000 shares
P5,000,000
Common stock, par, P5 per share; issued and
outstanding, 400,000 shares
2,000,000
Retained earnings
1,000,000
Total
P8,000,000
Dividends on preferred stock have been paid through 2006.
At December 31, 2007, M Corporations book value per share was
A. P5.50
C. P6.75
B. P6.25
D. P7.50
xxxv
.The following data were gathered from the annual report of Desk Products.
Market price per share
Number of common shares
Preferred stock, 5% P100 par
Common equity
The book value per share is:
A. P30.00
C. P14.00
B. P15.00
D. P13.75
P30.00
10,000
P10,000
P140,000
Integrated ratios
Liquidity & activity ratios
Inventory
xxxvi
.The current assets of Mayon 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
P1,120,000
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
.The following data were obtained from the records of Salacot Company:
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 and ending inventory
10.5 times
Gross margin for 2007
P360,000
What was Salacot Companys December 31, 2007 balance in the Inventory account?
A. P120,000
C. P 80,000
B. P 54,000
D. P 95,000
xxxvii
Net sales
xxxviii
.Selected data from Mildred Companys 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
P120,000
Inventory turnover (based on cost of sales)
8 times
Gross profit margin
40%
Mildreds net sales for the year were
A. P 800,000
C. P 480,000
B. P 672,000
D. P1,200,000
Gross margin
xxxix
.Selected information from the accounting records of the Blackwood Co. is as follows:
Net A/R at December 31, 2006
P 900,000
Net A/R at December 31, 2007
P1,000,000
Accounts receivable turnover
5 to 1
Inventories at December 31, 2006
P1,100,000
Inventories at December 31, 2007
P1,200,000
Inventory turnover
4 to 1
What was the gross margin for 2007?
A. P150,000
B. P200,000
C. P300,000
D. P400,000
P1,250,000
250,000
200,000
40 percent
20,000
25,000
40 percent
5 times
Comprehensive
xlii
.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
P600,000
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 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
xliii
.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
xliv
.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
xlv
.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
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xxii
xxiii
xxiv
xxv
xxvi
xxvii
xxviii
xxix
xxx
xxxi
xxxii
xxxiii
xxxiv
xxxv
xxxvi
xxxvii
xxxviii
xxxix
xl
xli
xlii
xliii
xliv
xlv