MODULE 10 3. Suppose you are comparing two firms in the steel industry.

One firm is
FINANCIAL STATEMENT ANALYSIS large and the other is small. Which type of numbers would be most
meaningful for statement analysis?
THEORIES: A. Absolute #s would be most meaningful for both the large and small firm.
6. Management is a user of financial analysis. Which of the following B. Absolute numbers would be most meaningful in the large firm; relative
comments does not represent a fair statement as to the management numbers would be most meaningful in the small firm.
perspective? C. Relative numbers would be most meaningful for the large firm; absolute
A. Management is always interested in maximum profitability. numbers would be most meaningful for the small firm.
B. Management is interested in the view of investors. D. Relative numbers would be most meaningful for both the large and small
C. Management is interested in the financial structure of the entity. firm, especially for interfirm comparisons.
D. Management is interested in the asset structure of the entity. 4. Which of these statements is false?
Limitations A. Many companies will not clearly fit into any one industry.
1. A limitation in calculating ratios in financial statement analysis is that B. A financial service uses its best judgment as to which industry the firm
A. it requires a calculator. best fits.
B. no one other than the management would be interested in them. C. The analysis of an entity's financial statements can be more meaningful if
C. some account balances may reflect atypical data at year end. the results are compared with industry averages and with results of
D. they seldom identify problem areas in a company. competitors.
2. Which of the following is not a limitation of financial statement analysis? D. A company comparison should not be made with industry averages if the
A. The cost basis. C. The diversification of firms. company does not clearly fit into any one industry.
B. The use of estimates. D. The availability of information. Common-sized financial statements
5. Which of the following does not represent a problem with financial 9. Which of the following generally is the most useful in analyzing companies
analysis? of different sizes?
A. Financial statement analysis is an art; it requires judgment decisions on A. comparative statements C. price-level accounting
the part of the analyst. B. common-sized financial statements D. profitability index
B. Financial analysis can be used to detect apparent liquidity problems. 12. Statements in which all items are expressed only in relative terms
C. There are as many ratios for financial analysis as there are pairs of (percentages of a base) are termed:
figures. A. Vertical statements C. Funds Statements
D. Some industry ratio formulas vary from source to source. B. Horizontal Statements D. Common-Size Statements
77. The use of alternative accounting methods: 10. The percent of property, plant and equipment to total assets is an
A. is not a problem in ratio analysis because the footnotes disclose the example of:
method used. A. vertical analysis C. profitability analysis
B. may be a problem in ratio analysis even if disclosed. B. solvency analysis D. horizontal analysis
C. is not a problem in ratio analysis since eventually all methods will lead to 15. Vertical analysis is a technique that expresses each item in a financial
the same end. statement
D. is only a problem in ratio analysis with respect to inventory. A. in pesos and centavos.
Industry Analysis 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. A. common stockholders C. preferred shareholders
17. In performing a vertical analysis, the base for prepaid expenses is B. general creditors such as banks D. bondholders
A. total current assets. C. total liabilities. Measures of Risk
B. total assets. D. prepaid expenses in a previous year. 54. The following groups of ratios primarily measure risk:
Horizontal analysis A. liquidity, activity, and common equity C. liquidity, activity, and debt
8. The percentage analysis of increases and decreases in individual items in B. liquidity, activity, and profitability D. activity, debt, and profitability
comparative financial statements is called: Financial ratios
A. vertical analysis C. profitability analysis 7. Ratios are used as tools in financial analysis
B. solvency analysis D. horizontal analysis A. instead of horizontal and vertical analyses.
11. Horizontal analysis is also known as B. because they can provide information that may not be apparent from
A. linear analysis. C. trend analysis. inspection of the individual components of a particular ratio.
B. vertical analysis. D. common size analysis. C. because even single ratios by themselves are quite meaningful.
13. In which of the following cases may a percentage change be computed? D. because they are prescribed by GAAP.
A. The trend of the amounts is decreasing but all amounts are positive. 18. In the near term, the important ratios that provide the information critical
B. There is no amount in the base year. to the short-run operation of the firm are:
C. There is a negative amount in the base year and a negative amount in A. liquidity, activity, and profitability C. liquidity, activity, and equity
the subsequent year. B. liquidity, activity, and debt D. activity, debt, and profitability
D. There is a negative amount in the base year and a positive amount in the 75. The ability of a business to pay its debts as they come due and to earn a
subsequent year. reasonable amount of income is referred to as:
14. Horizontal analysis is a technique for evaluating a series of financial A. solvency and leverage C. solvency and liquidity
statement data over a period of time B. solvency and profitability D. solvency and equity
A. that has been arranged from the highest number to the lowest number. Liquidity ratios
B. that has been arranged from the lowest number to the highest number. Interested parties
C. to determine which items are in error. 19. The primary concern of short-term creditors when assessing the strength
D. to determine the amount and/or percentage increase or decrease that of a firm is the entitys
has taken place. A. short-term liquidity C. market price of stock
Trend analysis B. profitability D. leverage
16. Trend analysis allows a firm to compare its performance to: 35. Short-term creditors are usually most interested in assessing
A. other firms in the industry C. other industries A. solvency. C. marketability.
B. other time periods within the firm D. none of the above B. liquidity. D. profitability.
Risk and return 36. The two categories of ratios that should be utilized to asses a firms true
29. The present and prospective stockholders are primarily concerned with a liquidity are the
firm A. current and quick ratios C. liquidity and profitability ratios
A. profitability C. leverage B. liquidity and debt ratios D. liquidity and activity ratios
B. liquidity D. risk and return 47. Which of the following is the most of interest to a firms suppliers?
69. Which suppliers of funds bear the greatest risk and should therefore A. profitability C. asset utilization
earn the greatest return? B. debt D. liquidity
Measures of liquidity 22. The current ratio is
21. The ratios that are used to determine a companys short-term debt A. calculated by dividing current liabilities by current assets.
paying ability are B. used to evaluate a companys liquidity and short-term debt paying ability.
A. asset turnover, times interest earned, current ratio, and receivables C. used to evaluate a companys solvency and long-term debt paying ability.
turnover. D. calculated by subtracting current liabilities from current assets.
B. times interest earned, inventory turnover, current ratio, and receivables 30. Which of the following ratios is rated to be a primary measure of liquidity
turnover. and considered of highest significance rating of the liquidity ratios a bank
C. times interest earned, acid-test ratio, current ratio, and inventory turnover. analyst?
D. current ratio, acid-test ratio, receivables turnover, and inventory turnover. A. Debt/Equity
20. Which of the following is a measure of the liquidity position of a B. Current ratio
corporation? C. Degree of Financial Leverage
A. earnings per share D. Accounts Receivable Turnover in Days
B. inventory turnover 41. A weakness of the current ratio is
C. current ratio A. the difficulty of the calculation.
D. number of times interest charges earned B. that it does not take into account the composition of the current assets.
37. Which one of the following ratios would not likely be used by a short- C. that it is rarely used by sophisticated analysts.
term creditor in evaluating whether to sell on credit to a company? D. that it can be expressed as a percentage, as a rate, or as a proportion.
A. Current ratio C. Asset turnover Acid-test or quick ratio
B. Acid-test ratio D. Receivables turnover 42. A measure of a companys immediate short-term liquidity is the
51. Which of the following ratios would be least helpful in appraising the A. current ratio.
liquidity of current assets? B. current cash debt coverage ratio.
A. Accounts Receivable turnover C. Current Ratio C. cash debt coverage ratio.
B. Days sales in inventory D. Days sales in accounts receivable D. acid-test ratio.
53. Which ratio is most helpful in appraising the liquidity of current assets? 23. The acid-test or quick ratio
A. current ratio C. acid-test ratio A. is used to quickly determine a companys solvency and long-term debt
B. debt ratio D. accounts receivable turnover paying ability.
Not a measure of liquidity B. relates cash, short-term investments, and net receivables to current
79. Which one of the following ratios would not likely be used by a short- liabilities.
term creditor in evaluating whether to sell on credit to a company? C. is calculated by taking one item from the income statement and one item
A. accounts receivable turnover. C. acid test ratio. from the balance sheet.
B. asset turnover. D. current ratio. D. is the same as the current ratio except it is rounded to the nearest whole
Current ratio percent.
24. Typically, which of the following would be considered to be the most Not a liquidity ratio
indicative of a firm's short-term debt paying ability? 28. Which one of the following would not be considered a liquidity ratio?
A. working capital C. acid test ratio A. Current ratio. C. Quick ratio.
B. current ratio D. days sales in receivables B. Inventory turnover. D. Return on assets.
Activity ratios
Days receivable & receivable turnover A. liquidity. C. profitability.
Quality of receivables B. marketability. D. solvency.
25. Which of the following does not bear on the quality of receivables? Financial Leverage
A. shortening the credit terms 45. Trading on the equity (leverage) refers to the
B. lengthening the credit terms A. amount of working capital.
C. lengthening the outstanding period B. amount of capital provided by owners.
D. all of the above bear on the quality of receivables C. use of borrowed money to increase the return to owners.
Days receivable D. earnings per share.
27. A general rule to use in assessing the average collection period is 90. The tendency of the rate earned on stockholders' equity to vary
A. that is should not exceed 30 days. disproportionately from the rate earned on total assets is sometimes referred
B. it can be any length as long as the customer continues to buy to as:
merchandise. A. leverage C. yield
C. that it should not greatly exceed the discount period. B. solvency D. quick assets
D. that it should not greatly exceed the credit term period. 55. Using financial leverage is a good financial strategy from the viewpoint of
Asset utilization ratios stockholders of companies having:
Performance measures A. a high debt ratio C. a steadily declining current ratio
65. All of the following are asset utilization ratios except: B. steady or rising profits D. cyclical highs and lows
A. average collection period C. receivables turnover 46. The ratio that indicates a companys degree of financial leverage is the
B. inventory turnover D. return on assets A. cash debt coverage ratio. C. free cash flow ratio.
Asset turnover B. debt to total assets. D. times-interest earned ratio.
63. Asset turnover measures 73. Interest expense creates magnification of earnings through financial
A. how often a company replaces its assets. leverage because:
B. how efficiently a company uses its assets to generate sales. A. while earnings available to pay interest rise, earnings to residual owners
C. the portion of the assets that have been financed by creditors. rise faster
D. the overall rate of return on assets. B. interest accompanies debt financing
66. Total asset turnover measures the ability of a firm to: C. interest costs are cheaper than the required rate of return to equity
A. generate profits on sales owners
B. generate sales through the use of assets S. the use of interest causes higher earnings
C. cover long-term debt Measures of solvency
D. buy new assets 34. The set of ratios that is most useful in evaluating solvency is
76. A measure of how efficiently a company uses its assets to generate A. debt ratio, current ratio, and times interest earned
sales is the B. debt ratio, times interest earned, and return on assets
A. asset turnover ratio. C. profit margin ratio. C. debt ratio, times interest earned, and quick ratio
B. cash return on sales ratio. D. return on assets ratio. D. debt ratio, times interest earned, and cash flow to debt
Solvency ratios 49. Which of the following ratios is most relevant to evaluating solvency?
Interested parties A. Return on assets C. Days purchases in accounts payable
50. Long-term creditors are usually most interested in evaluating B. Debt ratio D. Dividend yield
Fixed assets to long-term liabilities A. is a balance sheet indication of debt carrying ability
44. Which of the following ratios provides a solvency measure that shows B. is an income statement indication of debt carrying ability
the margin of safety of noteholders or bondholders and also gives an C. frequently includes research and development
indication of the potential ability of the business to borrow additional funds D. computation is standard from firm to firm
on a long-term basis? Off-balance sheet liabilities
A. ratio of fixed assets to long-term liabilities 62. If a firm has substantial capital or financing leases disclosed in the notes
B. ratio of net sales to assets but not capitalized in the financial statements, then the
C. number of days' sales in receivables A. times interest earned ratio will be overstated, based upon the financial
D. rate earned on stockholders' equity statements
Debt ratio B. debt ratio will be understated
59. The debt ratio indicates: C. working capital will be understated
A. a comparison of liabilities with total assets D. fixed charge ratio will be overstated, based upon the financial statements
B. the ability of the firm to pay its current obligations Profitability ratios
C. the efficiency of the use of total assets Interested parties
D. the magnification of earnings caused by leverage 39. The return on assets ratio is affected by the
78. The debt to total assets ratio measures A. asset turnover ratio.
A. the companys profitability. B. debt to total assets ratio.
B. whether interest can be paid on debt in the current year. C. profit margin ratio.
C. the proportion of interest paid relative to dividends paid. D. asset turnover and profit margin ratios.
D. the percentage of the total assets provided by creditor. 52. Stockholders are most interested in evaluating
Debt-to-equity ratio A. liquidity. C. profitability.
60. Which of the following statements best compares long-term borrowing B. solvency. D. marketability.
capacity ratios? Performance measures
A. The debt/equity ratio is more conservative than the debt ratio. 48. The set of ratios that are most useful in evaluating profitability is
B. The debt to tangible net worth ratio is more conservative than the A. ROA, ROE, and debt to equity ratio C. ROA, ROE, and acid-test ratio
debt/equity ratio. B. ROA, ROE, and dividend yield D. ROA, ROE, and cash flow to debt
C. The debt/equity ratio is more conservative than the debt to tangible net Earnings per share
worth ratio. 82. Which of the following ratios appears most frequently in annual reports?
D. The debt ratio is more conservative than the debt/equity ratio. A. Earnings per Share C. Profit Margin
Times interest earned B. Return on Equity D. Debt/Equity
74. A times interest earned ratio of 0.90 to 1 means that Return on assets
A. the firm will default on its interest payment 64. Return on assets
B. net income is less than the interest expense A. can be determined by looking at a balance sheet
C. the cash flow is less than the net income B. should be smaller than return on sales
D. the cash flow exceeds the net income C. can be affected by the companys choice of a depreciation method
Fixed charge coverage D. should be larger than return on equity
61. A fixed charge coverage: Return on investments
72. Return on investment measures: C. a decline in days' sales in inventory
A. return to all suppliers of funds C. return to all long-term suppliers of funds D. a rise in total asset turnover
B. return to all long-term creditors D. return to stockholders 89. When Tri-C Corp. compares its ratios to industry averages, it has a
Market test ratios higher current ratio, an average quick ratio, and a low inventory turnover.
Price-earnings ratio What might you assume about Tri-C?
56. The price/earnings ratio A. Its cash balance is too low. C. Its current liabilities are too low.
A. measures the past earning ability of the firm B. Its cost of goods sold is too low. D. Its average inventory is too high.
B. is a gauge of future earning power as seen by investors Current ratio
C. relates price to dividends 33. Which of the following would be most detrimental to a firm's current ratio
D. relates if that ratio is currently 2.0?
58. Which of the following ratios usually reflects investors opinions of the A. Buy raw materials on credit
future prospects for the firm? B. Sell marketable securities at cost
A. dividend yield C. book value per share C. Pay off accounts payable with cash
B. price/earnings ratio D. earnings per share D. Pay off a portion of long-term debt with cash
Dividend yield Fixed asset turnover ratio
57. Which of the following ratios represents dividends per common share in 68. Which of the following circumstances will cause sales to fixed
relation to market price per common share? assets to be abnormally high?
A. dividend payout C. price/earnings A. A labor-intensive industry.
B. dividend yield D. book value per share B. The use of units-of-production depreciation.
Financial Statement Analysis C. A highly mechanized facility.
Accounts Receivable D. High direct labor costs from a new union contract.
26. Which of the following reasons should not be considered in order to Total asset turnover
explain why the receivables appear to be abnormally high? 81. A firm with a total asset turnover lower than the industry standard and a
A. Sales volume decreases materially late in the year. current ratio which meets industry standard might have excessive:
B. Receivables have collectibility problems and possibly some should have A. Accounts receivable C. Debt
been written off. B. Fixed assets D. Inventory
C. Material amount of receivables are on the installment basis. Profitability analysis
D. Sales volume expanded materially late in the year. 84. Denver Dynamics has net income of P2,000,000. Oakland Enterprises
31. An acceleration in the collection of receivables will tend to cause the has net income of P2,500,000. Which of the following best compares the
accounts receivable turnover to: profitability of Denver and Oakland?
A. decrease C. either increase or decrease A. Oakland Enterprises is 25% more profitable than Denver Dynamics.
B. remain the same D. increase B. Oakland Enterprises is more profitable than Denver Dynamics, but the
Inventories comparison can't be quantified.
32. Which of the following would best indicate that the firm is carrying C. Oakland Enterprises is only more profitable if it is smaller than Denver
excess inventory? Dynamics.
A. a decline in the current ratio D. Further information is needed for a reasonable comparison.
B. stable current ratio with declining quick ratios Debt ratio
86. Companies A and B are in the same industry and have similar D. The ratio increased.
characteristics except that Company A is more leveraged than Company B. 88. Which of the following actions will increase a firm's current ratio if it is
Both companies have the same income before interest and taxes and the now less than 1.0?
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.
D. Company A has a lower debt ratio than company B Acid-test ratio
Sensitivity Analysis 38. If a company has an acid-test ratio of 1.2:1, what respective effects will
Current ratio the borrowing of cash by short-term debt and collection of accounts
40. A firm has a current ratio of 1:1. In order to improve its liquidity ratios, receivable have on the ratio?
this firm should A. B. C. D.
A. improve its collection practices, thereby increasing cash and increasing Short-term borrowing Increase Increase Decrease Decrease
its current and quick ratios. Collection of receivable No effect Increase No effect Decrease
B. improve its collection practices and pay accounts payable, there Profit margin
decreasing current liabilities and increasing the current and quick ratios. 70. Which of the following would most likely cause a rise in net profit
C. decrease current liabilities by utilizing more long-term debt, thereby margin?
increasing the current and quick ratios. A. increased sales C. decreased operating expenses
D. increase inventory, thereby increasing current assets and the current and B. decreased preferred dividends D. increased cost of sales
quick ratios. Return on assets
43. Recently the M&M Company has been having problems. As a result, its 67. Return on assets cannot fall under which of the following circumstances?
financial situation has deteriorated. M&M approached the First National A. B. C. D.
Bank for a badly needed loan, but the loan officer insisted that the current Net profit margin Decline Rise Rise Decline
ratio (now 0.5) be improved to at least 0.8 before the bank would even Total asset turnover Rise Decline Rise Decline
consider granting the credit. Which of the following actions would do the Debt ratio
most to improve the ratio in the short run? 83. Jones Company has long-term debt of P1,000,000, while Smith
A. Using some cash to pay off some current liabilities. Company, Jones' competitor, has long-term debt of P200,000. Which of the
B. Collecting some of the current accounts receivable. following statements best represents an analysis of the long-term debt
C. Paying off some long-term debt. position of these two firms?
D. Purchasing additional inventory on credit (accounts payable). A. Jones obviously has too much debt when compared to its competitor.
87. Tyner Company had P250,000 of current assets and P90,000 of current B. Smith Company's times interest earned should be lower than Jones.
liabilities before borrowing P60,000 from the bank with a 3-month note C. Smith has five times better long-term borrowing ability than Jones.
payable. What effect did the borrowing transaction have on Tyner D. Not enough information to determine if any of the answers are correct.
Company's current ratio? Times interest earned
A. The ratio remained unchanged. 85. Which of the following will not cause times interest earned to drop?
B. The change in the current ratio cannot be determined. Assume no other changes than those listed.
C. The ratio decreased. A. A rise in preferred stock dividends.
B. A drop in sales with no change in interest expense. Notes payable, due in six months 250,000
C. An increase in interest rates. What will happen to the ratios below if Ratio Company uses cash to pay 50
D. An increase in bonds payable with no change in operating income. percent of its accounts payable?
DuPont Analysis A. B. C. D.
71. Which of the following could cause return on assets to decline when net Current ratio Increase Decrease Increase Decrease
profit margin is increasing? Acid-test ratio Increase Decrease Decrease Increase
A. sale of investments at year-end Question Nos. 4 through 6 are based on the data taken from the balance
B. increased turnover of operating assets sheet of Nomad Company at the end of the current year:
C. purchase of a new building at year-end Accounts payable P145,000
D. a stock split Accounts receivable 110,000
80. A firm with a lower net profit margin can improve its return on total Accrued liabilities 4,000
assets by Cash 80,000
A. increasing its debt ratio C. increasing its total asset turnover Income tax payable 10,000
B. decreasing its fixed assets turnover D. decreasing its total asset turnover Inventory 140,000
Marketable securities 250,000
PROBLEMS: Notes payable, short-term 85,000
Horizontal analysis Prepaid expenses 15,000
1. Kline Corporation had net income of P2 million in 2006. Using the 2006 4. The amount of working capital for the company is:
financial elements as the base data, net income decreased by 70 percent in A. P351,000 C. P211,000
2007 and increased by 175 percent in 2008. The respective net income B P361,000 D. P336,000
reported by Kline Corporation for 2007 and 2008 are: 5. The companys current ratio as of the balance sheet date is:
A. P 600,000 and P5,500,000 C. P1,400,000 and P3,500,000 A. 2.67:1 C. 2.02:1
B. P5,500,000 and P 600,000 D. P1,400,000 and P5,500,000 B. 2.44:1 D. 1.95:1
2. Assume that Axle Inc. reported a net loss of P50,000 in 2006 and net 6. The companys acid-test ratio as of the balance sheet date is:
income of P250,000 in 2007. The increase in net income of P300,000: A. 1.80:1 C. 2.02:1
A. can be stated as 0% C. cannot be stated as a percentage B. 2.40:1 D. 1.76:1
B. can be stated as 100% increase D. can be stated as 200% increase Activity ratios
Liquidity ratios Receivables turnover
3. The following financial data have been taken from the records of Ratio 7. Pine Hardware Store had net credit sales of P6,500,000 and cost of
Company: goods sold of P5,000,000 for the year. The Accounts Receivable balances
Accounts receivable P200,000 at the beginning and end of the year were P600,000 and P700,000,
Accounts payable 80,000 respectively. The receivables turnover was
Bonds payable, due in 10 years 500,000 A. 7.7 times. C. 9.3 times.
Cash 100,000 B. 10.8 times. D. 10.0 times.
Interest payable, due in three months 25,000 8. Milward Corporations books disclosed the following information for the
Inventory 440,000 year ended December 31, 2007:
Land 800,000 Net credit sales P1,500,000
Net cash sales 240,000 13. The Moss Company presents the following data for 2007.
Accounts receivable at beginning of year 200,000 Net Sales, 2007 P3,007,124
Accounts receivable at end of year 400,000 Net Sales, 2006 P 930,247
Milwards accounts receivable turnover is Cost of Goods Sold, 2007 P2,000,326
A. 3.75 times C. 5.00 times Cost of Goods Sold, 2007 P1,000,120
B. 4.35 times D. 5.80 times Inventory, beginning of 2007 P 341,169
Days receivable Inventory, end of 2007 P 376,526
9. Batik Clothing Store had a balance in the Accounts Receivable account of The merchandise inventory turnover for 2007 is:
P390,000 at the beginning of the year and a balance of P410,000 at the end A. 5.6 C. 7.5
of the year. The net credit sales during the year amounted to P4,000,000. B. 15.6 D. 7.7
Using 360-day year, what is the average collection period of the 14. Based on the following data for the current year, what is the inventory
receivables? turnover?
A. 30 days C. 73 days Net sales on account during year P 500,000
B. 65 days D. 36 days Cost of merchandise sold during year 330,000
Cash collection Accounts receivable, beginning of year 45,000
10. Deity Company had sales of P30,000, increase in accounts payable of Accounts receivable, end of year 35,000
P5,000, decrease in accounts receivable of P1,000, increase in inventories Inventory, beginning of year 90,000
of P4,000, and depreciation expense of P4,000. What was the cash Inventory, end of year 110,000
collected from customers? A. 3.3 C. 3.7
A. P31,000 C. P34,000 B. 8.3 D. 3.0
B. P35,000 D. P25,000 Days inventory
Inventory turnover 15. Selected information from the accounting records of Eternity
11. During 2007, Tarlac Company purchased P960,000 of inventory. The Manufacturing Company follows:
cost of goods sold for 2007 was P900,000, and the ending inventory at Net sales P3,600,000
December 31, 2007 was P180,000. What was the inventory turnover for Cost of goods sold 2,400,000
2007? Inventories at January 1 672,000
A. 6.4 C. 5.3 Inventories at December 31 576,000
B. 6.0 D. 5.0 What is the number of days sales in average inventories for the year?
12. Selected information from the accounting records of Petals Company is A. 102.2 C. 87.6
as follows: B. 94.9 D. 68.1
Net sales for 2007 P900,000 Turnover ratios
Cost of goods sold for 2007 600,000 Asset turnover
Inventory at December 31, 2006 180,000 Asset
Inventory at December 31, 2007 156,000 16. Net sales are P6,000,000, beginning total assets are P2,800,000, and
Petals inventory turnover for 2007 is the asset turnover is 3.0. What is the ending total asset balance?
A. 5.77 times C. 3.67 times A. P2,000,000. C. P2,800,000.
B. 3.85 times D. 3.57 times B. P1,200,000. D. P1,600,000.
Solvency ratios Income before income tax for year 350,000
Debt ratio Income tax for year 80,000
17. Jordan Manufacturing reports the following capital structure: Common dividends paid 50,000
Current liabilities P100,000 Preferred dividends paid 15,000
Long-term debt 400,000 Based on the data presented above, what is the number of times bond
Deferred income taxes 10,000 interest charges were earned (round to one decimal point)?
Preferred stock 80,000 A. 3.7 C. 4.5
Common stock 100,000 B. 4.4 D. 3.5
Premium on common stock 180,000 21. The following data were abstracted from the records of Johnson
Retained earnings 170,000 Corporation for the year:
What is the debt ratio? Sales P1,800,000
A. 0.48 C. 0.93 Bond interest expense 60,000
B. 0.49 D. 0.96 Income taxes 300,000
Times interest earned Net income 400,000
18. House of Fashion Company had the following financial statistics for How many times was bond interest earned?
2006: A. 7.67 C. 12.67
Long-term debt (average rate of interest is 8%) P400,000 B. 11.67 D. 13.67
Interest expense 35,000 Net income
Net income 48,000 22. The times interest earned ratio of Mikoto Company is 4.5 times. The
Income tax 46,000 interest expense for the year was P20,000, and the companys tax rate is
Operating income 107,000 40%. The companys net income is:
What is the times interest earned for 2006? A. P22,000 C. P54,000
A. 11.4 times C. 3.1 times B. P42,000 D. P66,000
B. 3.3 times D. 3.7 times Profitability Ratios
19. Brava Company reported the following on its income statement: Return on Common Equity
Income before taxes P400,000 23. Selected information for Ivano Company as of December 31 is as
Income tax expense 100,000 follows:
Net income P300,000 2006 2007
An analysis of the income statement revealed that interest expense was Preferred stock, 8%, par P100, nonconvertible, noncumulative P250,000 P250,000
P100,000. Brava Companys times interest earned (TIE) was Common stock 600,000 800,000
A. 5 times C. 3.5 times Retained earnings 150,000 370,000
B. 4 times D. 3 times Dividends paid on preferred stock for the year 20,000 20,000
20. The balance sheet and income statement data for Candle Factory Net income for the year 120,000 240,000
indicate the following: Ivanos return on common stockholders equity, rounded to the nearest
Bonds payable, 10% (issued 1998 due 2022) P1,000,000 percentage point, for 2007 is
Preferred 5% stock, P100 par (no change during year) 300,000 A. 17% C. 21%
Common stock, P50 par (no change during year) 2,000,000 B. 19% D. 23%
Dividend yield 27. On December 31, 2006 and 2007, Renegade Corporation had 100,000
24. The following information is available for Duncan Co.: shares of common stock and 50,000 shares of noncumulative and
2006 nonconvertible preferred stock issued and outstanding.
Dividends per share of common stock P 1.40 Additional information:
Market price per share of common stock 17.50 Stockholders equity at 12/31/07 P4,500,000
Which of the following statements is correct? Net income year ended 12/31/07 1,200,000
A. The dividend yield is 8.0%, which is of interest to investors seeking an Dividends on preferred stock year ended 12/31/07 300,000
increase in market price of their stocks. Market price per share of common stock at 12/31/07 144
B. The dividend yield is 8.0%, which is of special interest to investors The price-earnings ratio on common stock at December 31, 2007, was
seeking current returns on their investments. A. 10 to 1 C. 14 to 1
C. The dividend yield is 12.5%, which is of interest to bondholders. B. 12 to 1 D. 16 to 1
D. The dividend yield is 8.0 times the market price, which is important in Payout ratio
solvency analysis. 28. Selected financial data of Alexander Corporation for the year ended
Market Test Ratios December 31, 2007, is presented below:
Market/Book value ratio Operating income P900,000
Price per share Interest expense (100,000)
25. What is the market price of a share of stock for a firm with 100,000 Income before income taxes 800,000
shares outstanding, a book value of equity of P3,000,000, and a Income tax (320,000)
market/book ratio of 3.5? Net income 480,000
A. P8.57 C. P85.70 Preferred stock dividend (200,000)
B. P30.00 D. P105.00 Net income available to common stockholders 280,000
P/E ratio Common stock dividends were P120,000. The payout ratio is:
26. Orchard Companys capital stock at December 31 consisted of the A. 42.9 percent C. 25.0 percent
following: B. 66.7 percent D. 71.4 percent
Common stock, P2 par value; 100,000 shares authorized, issued, and P/E ratio & Payout ratio
outstanding. Use the following information for question Nos. 33 and 34:
10% noncumulative, nonconvertible preferred stock, P100 par value; Terry Corporation had net income of P200,000 and paid dividends to
1,000 shares authorized, issued, and outstanding. common stockholders of P40,000 in 2007. The weighted-average number
Orchards common stock, which is listed on a major stock exchange, was of shares outstanding in 2007 was 50,000 shares. Terry Corporations
quoted at P4 per share on December 31. Orchards net income for the year common stock is selling for P60 per share in the local stock exchange.
ended December 31 was P50,000. The yearly preferred dividend was 29. Terry Corporations price-earnings ratio is
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 30. Terry Corporations payout ratio for 2007 is
B. 8 to 1 D. 16 to 1 A. P4 per share C. 20.0 percent
B. 12.5 percent D. 25.0 percent
DuPont Model
Debt ratio Common stock, par, P5 per share; issued and
31. The Board of Directors is dissatisfied with last year's ROE of 15%. If the outstanding, 400,000 shares 2,000,000
profit margin and asset turnover remain unchanged at 8% and 1.25 Retained earnings 1,000,000
respectively, by how much must the total debt ratio increase to achieve 20% Total P8,000,000
ROE? Dividends on preferred stock have been paid through 2006.
A. Total debt ratio must increase by .5 At December 31, 2007, M Corporations book value per share was
B. Total debt ratio must increase by 5 A. P5.50 C. P6.75
C. Total debt ratio must increase by 5% B. P6.25 D. P7.50
D. Total debt ratio must increase by 50% 35. The following data were gathered from the annual report of Desk
32. Assume you are given the following relationships for the Orange Products.
Company: Market price per share P30.00
Sales/total assets 1.5x Number of common shares 10,000
Return on assets (ROA) 3% Preferred stock, 5% P100 par P10,000
Return on equity (ROE) 5% Common equity P140,000
The Orange Companys debt ratio is The book value per share is:
A. 40% C. 35% A. P30.00 C. P14.00
B. 60% D. 65% B. P15.00 D. P13.75
Leverage Ratio Integrated ratios
33. A summarized income statement for Leveraged Inc. is presented below. Liquidity & activity ratios
Sales P1,000,000 Inventory
Cost of Sales 600,000 36. The current assets of Mayon Enterprise consists of cash, accounts
Gross Profit P 400,000 receivable, and inventory. The following information is available:
Operating Expenses 250,000 Credit sales 75% of total sales
Operating Income P 150,000 Inventory turnover 5 times
Interest Expense 30,000 Working capital P1,120,000
Earnings Before Tax P 120,000 Current ratio 2.00 to 1
Income Tax 40,000 Quick ratio 1.25 to 1
Net Income P 80,000 Average Collection period 42 days
The degree of financial leverage is: Working days 360
A. P 150,000 P 30,000 C. P1,000,000 P400,000 The estimated inventory amount is:
B. P 150,000 P120,000 D. P 150,000 P 80,000 A. 840,000 C. 720,000
Other Ratios B. 600,000 D. 550,000
Book value per share 37. The following data were obtained from the records of Salacot Company:
34. M Corporations stockholders equity at December 31, 2007 consists of Current ratio (at year end) 1.5 to 1
the following: Inventory turnover based on sales and ending inventory 15 times
6% cumulative preferred stock, P100 par, liquidating value Inventory turnover based on COGS and ending inventory 10.5x
was P110 per share; issued and outstanding 50,000 shares P5,000,000 Gross margin for 2007 P360,000
What was Salacot Companys December 31, 2007 balance in the Inventory Preferred 20,000
account? Common 25,000
A. P120,000 C. P 80,000 Income tax rate 40 percent
B. P 54,000 D. P 95,000 Price earnings ratio 5 times
38. Selected data from Mildred Companys year-end financial statements The dividend yield ratio is
are presented below. The difference between average and ending inventory A. 0.50 C. 0.40
is immaterial. B. 0.12 D. 0.08
Current ratio 2.0 Comprehensive
Quick ratio 1.5 42. The balance sheets of Magdangal Company at the end of each of the
Current liabilities P120,000 first two years of operations indicate the following:
Inventory turnover (based on cost of sales) 8 times 2007 2006
Gross profit margin 40% Total current assets P600,000 P560,000
Mildreds net sales for the year were Total investments 60,000 40,000
A. P 800,000 C. P 480,000 Total property, plant, and equipment 900,000 700,000
B. P 672,000 D. P1,200,000 Total current liabilities 150,000 80,000
39. Selected information from the accounting records of the Blackwood Co. Total long-term liabilities 350,000 250,000
is as follows: Preferred 9% stock, P100 par 100,000 100,000
Net A/R at December 31, 2006 P 900,000 Common stock, P10 par 600,000 600,000
Net A/R at December 31, 2007 P1,000,000 Paid-in capital in excess of par-common stock 60,000 60,000
Accounts receivable turnover 5 to 1 Retained earnings 300,000 210,000
Inventories at December 31, 2006 P1,100,000 Net income is P115,000 and interest expense is P30,000 for 2007.
Inventories at December 31, 2007 P1,200,000 What is the rate earned on total assets for 2007 (round percent to one
Inventory turnover 4 to 1 decimal point)?
What was the gross margin for 2007? A. 9.3 percent C. 8.9 percent
A. P150,000 C. P300,000 B. 10.1 percent D. 7.4 percent
B. P200,000 D. P400,000 43. What is the rate earned on stockholders' equity for 2007 (round percent
Market Test Ratio to one decimal point)?
40. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, A. 10.6 percent C. 12.4 percent
and a pay out ratio of 75%. The dividend yield is B. 11.2 percent D. 15.6 percent
A. 25.0% C. 7.5% 44. What is the earnings per share on common stock for 2007, (round to two
B. 22.0% D. 10.0% decimal places)?
41. The following were reflected from the records of Salvacion Company: A. P1.92 C. P1.77
Earnings before interest and taxes P1,250,000 B. P1.89 D. P1.42
Interest expense 250,000 45. If the market price is P30, what is the price-earnings ratio on common
Preferred dividends 200,000 stock for 2007 (round to one decimal point)?
Payout ratio 40 percent A. 17.0 C. 12.4
Shares outstanding throughout 2006 B. 12.1 D. 15.9