FINANCIAL STATEMENT ANALYSIS, RATIO ANALYSIS- THEORIES

1. The ratio of earnings before interest and taxes to total interest expense is a measure of
a. Liquidity
b. Activity
c. Risk
d. Profitability
B
2. Trial, Inc. has a current ratio of 65 to 1. A cash dividend declared last month is paid this month.
What is the effect of this dividend payment on the current ratio and working capital
respectively?
a. Rise and decline
b. Rise and No effect
c. Decline and no effect
d. No effect on either
C
3. A company has a current ratio of 2 to 1. This ratio will decrease if the company
a. Receives a 5% stock dividend on one of its marketable securities
b. Pays a large account payable, which had been a current liability
c. Borrows cash on a six-month note
d. Sells merchandise for more than cost and record the sale using the perpetual inventory
method.
C
4. Delta Corp. wrote off a P1000 uncollectible account receivable against the P12000 balance in its
allowance account compare the current ratio before the write-off (X) with the current ratio alter
the write-off (Y)
a. X greater than Y
b. X equals Y
c. X less than Y
d. Cannot be determined
B
5. Epsilon Company has a current ratio of 2 to 1. A transaction reduces the current ratio. Compare
the working capital before this transaction (X) and the working capital after this transaction (Y)
a. X greater than Y
b. X equals Y
c. X less than Y
d. Cannot be determined
D
6. In comparing the current ratio of two companies, why is it invalid to assume that the company
with the higher current ratio is the better company?
a. The current ratio includes assets other than cash
b. A higher current ratio may indicate inadequate inventory on hand
c. A higher current ratio may indicate insufficient use of various assets and liabilities
d. The two companies may define working capital in different terms
C
7. If current assets exceed current liabilities, payments to creditors made on the last day of the
month
a. Will decrease current ratio
b. Will increase current ratio
c. Will decrease working capital
d. Will increase working capital
B
8. Which of the following is ratios measures short term liquidity?
a. Current ratio
b. Age of receivables
c. Creditors equity to total assets
d. Return on investment
A
9. Which of the following is an appropriate computation for return on investment?
a. Income divided by total assets
b. Income divided by sales
c. Sales divided by total assets
d. Sales divided by common equity
A
10. Which of the following accounts would be included in the calculation of acid test (quick) ratio?
ACCOUNTS RECEIVABLE INVENTORIES
a. No No
b. No Yes
c. Yes No
d. Yes Yes
C
11. Inventories would be included in the calculation of which of the following?
ACID-TEST RATIO CURRENT RATIO
a. Yes Yes
b. Yes No
c. No Yes
d. No Yes
C
12. What is the effect of the collection of accounts receivable on the current ratio and net working
capital respectively?
CURRENT RATIO NET WORKING CAPITAL
a. No effect No effect
b. Increase Increase
c. Increase No effect
d. No effect Increase
A
13. How are the following used in the calculation of the dividend pay-out ratio for a company with
only common stock outstanding?
DIVIDEND PER SHARE EARNINGS PER SHARE BOOK VALUE PER SHARE
a. Denominator Numerator Not used
b. Denominator Not used Numerator
c. Numerator Denominator Not used
d. Numerator Not used Denominator
C
14. Which of the following represent quick assets?
a. Cash+ Net Receivables+ Inventories
b. Cash+ Marketable securities+ Inventories
c. Cash+ Net Receivables+ Prepaid expenses
d. Cash+ Marketable securities+ Net Receivables
D
15. Which of the following measures price-earnings ratio?
a. Book value per share divided by Earnings per share
b. Dividends on common share divided by Market price per share
c. Market price per share divided by earnings per share
d. Market price per share divided by Book value per share
C
16. How is the average inventory used in the calculation of each of the following?
ACID TEST RATIO INVENTORY TURNOVER
a. Numerator Numerator
b. Numerator Denominator
c. Not used Denominator
d. Not used Numerator
C
17. When the allowance method of recognizing bad debts expense is used, the entries at the time of
collection of a small account previously written off would
a. Increase net income
b. Have no effect on total current assets
c. Increase working capital
d. Decrease total current liabilities
B
18. How are earnings per share used in the calculation of the following?
DIVIDEND PER SHARE PAY-OUT RATIO PRICE EARNINGS RATIO
a. Numerator Numerator
b. Denominator Numerator
c. Not used Denominator
d. Denominator Denominator
D
19. How are the dividends per share for common stock used in the calculation of the following?
DIVIDEND PER SHARE PAY-OUT RATIO EARNINGS PER SHARE
a. Denominator Denominator
b. Denominator Not used
c. Numerator Not used
d. Numerator Numerator
C
20. The invested capital-employed turnover rate would include
a. Net income in the numerator
b. Net income in the denominator
c. Sales in the numerator
d. Sales in the denominator
C
21. How are the trade receivables used in the calculation of each of the following?
ACID-TEST RATIO RECEIVABLE TURNOVER
a. Numerator Numerator
b. Numerator Denominator
c. Denominator Denominator
d. Not used Numerator
B
22. A companys return on investment is affected by a change in
CAPITAL TURNOVER PROFIT MARGIN ON SALES
a. Yes Yes
b. Yes No
c. No No
d. No Yes
A
23. When a balance sheet amount is related to an income statement amount in computing a ratio
a. The balance sheet amount should be converted to an average for the year
b. The income statement amount should be converted to an average for the year
c. Both amounts should be converted to market value
d. Comparisons with industry ratios are not meaningful
A
24. The ratio of sales to working capital is a measure of
a. Collectibility
b. Financial Leverage
c. Liquidity
d. Profitability
C
25. The number of days sales in receivables is a measure of
a. Asset value
b. Sales performance
c. Profitability
d. Liquidity
D
26. A high sales to working capital ratio could indicate
a. Unpredictable use of working capital
b. Sales are not adequate relative to available working capital
c. The firm is undercapitalized
d. The firm is not susceptible to liquidity problems
C
27. What will happen to the ratios below if ABC enterprises use cash to pay 20% of the accounts
payable?
CURRENT RATIO QUICK RATIO
a. Increase Increase
b. Decrease Decrease
c. Increase Decrease
d. Decrease Increase
A
28. Accounts receivable turnover ratio will normally decrease as a result of
a. The write off of an uncollectible account (assume the used of allowance for doubtful
accounts method)
b. A significant sales volume decrease near the end of the accounting period
c. An increase in cash sales in proportion to credit sales
d. A change in credit policy to lengthen the period for cash discounts
D
 29. The issuance of new shares in a five-for-one split of common stock
a. Decreases the book value per share of common stock
b. Increases the book value per share of common stock
c. Increases total stockholders equity
d. Decreases total stockholders equity
A
30. To determine the operating cycle for a retail department store, which one of the following pairs
of items is needed?
a. Days sales in accounts receivable and average merchandise inventory
b. Cash turnover and net sales
c. Accounts receivable turnover and inventory turnover
d. Asset turnover and return on sales
C

FINANCIAL STATEMENT ANALYSIS, RATIO ANALYSIS-PROBLEMS

1. Marko Corporation uses the allowance method for bad debts. During 2004, Marko charged
P30, 000 to bad debts expense, and wrote off P25, 000 of uncollectible accounts receivable.
These transaction results in a decrease in working capital of
a. None b. P 4, 800 c. P25, 200 d. P30, 000

D. The P30, 000 charged to bad debts is correspondingly credited to allowance for bad
debts which reduce working capital by P30, 000. The write-off will have no effect.

2. George Corporation declared cash dividend of P10, 000 on October 17, 2004. This dividend was
payable to stockholders of record on November 10, 2004, and payment was made on December
2, 2004. As a result of this cash dividends, working capital will increase (decrease) on
OCTOBER 17 NOVEMBER 19
a. None None
b. P 10, 000 None
c. P (10, 000) None
d. P (10, 000) P 10, 000

C. The entry on January 17 is:

Retained earnings 10, 000
Dividends Payable 10,000
The credited to dividends payable decreases working capital.
 ITEMS 3-6 ARE BASED ON THE FOLLOWING INFORMATION:

Alpha Corporation
Selected financial data
Accounts Year ended December 31
2003 2004
Cash Php10,000.00 Php80,000.00
Marketable securities 50,000.00 10,000.00
Accounts Receivables, net 30,000.00 150,000.00
Inventories 90,000.00 150,000.00
Land and building, net 340,000.00 360,000.00
Notes payable, Trade 70,000.00 110,000.00
Accounts payable, trade 20,000.00 40,000.00
Mortgage payable 270,000.00 280,000.00

Year ended December 31

2003 2004
Cash sales Php1,800,000.00 Php1,600,000.00
Credit sales 500000.00 800000.00
Cost of sales 1000000.00 1400000.00

3. Alphas acid-test (quick) ratio as of December 31, 2003 is

a. 0.5 to 1 b. 0.7 to 1 c. 1.0 to 1 d. 2.0 to 1

C. Quick ratio = P 10,000 + 50,000 + 30,000 = 1.0 to 1

(P 70,000 + 20,000)

4. Alphas current ratio at December 31, 2004 is

a. 0.5 to 1 b. 0.7 to 1 c. 1.0 to 1 d. 2.0 to 1

D. Current ratio = P 10,000 + 50,000+ 30,000+ 90,000 = 2.0 to 1

(P 70,000+20,000)
5. Alphas receivable turnover for 2004 is
a. 5 times b. 10 times c. 23 times d. 46 times

A. Receivable turnover = P500,000 = 5.0 times

(P50, 000+ 150,000)/ 2

6. Alphas inventory turnover for 2004 is

a. 8.3 times b. 10 times c. 11.1 times d. 13.3 times

A. Inventory turnover = P1,000,000 = 8.3 times

(P90, 000+150,000)/2

7. Information from Greg Companys balance sheet is as follows:

Current Assets:
Cash P2,400,000.00
Marketable securities 7,500,000.00
Accounts Receivable 57,600,000.00
Inventories 66,300,000.00
Prepaid expenses 1,200,000.00 P135,000,000.00
Current Liabilities:
Notes payable P1,500,000.00
Accounts Payable 19,500,000.00
Accrued Payable 12,500,000.00
Income tax payable 500,000.00
Current portion of long-term debt 3,500,000.00 P37,500,000.00

What is the acid-test (quick) ratio?

a. 1.60 to 1 b. 1.80 to 1 c.1.99 to 1 d.3.60 to 1

B. Acid-test ratio= P2,400,000+ 7,500,000+57,600,000 = 1.8 to 1

P37, 500,000
8. Selected Information- from the Vigor Companys accounting records is as follows

Net accounts receivable at December 31, 2003 P900, 000

Net accounts receivable at December 31, 2004 1,000,000
Inventories- December 31, 2003 1,100,000
Inventories- December 31, 2004 1,200,000
Accounts receivable turnover 5 to 1
Inventory turnover 4 to 1

What was Vigors gross margin for 2004?

a. P150,000 b. P200,000 c. P300,000 d. P400,000

A. Net sales (P950,000*x 5) P4,750,000

Cost of sales (P1, 150,000**x4) 4,600,000
Gross margin P 150,000

* Average receivables = (P900, 000+1,000,000)/2 = P950, 000

**Average Inventory = (P1, 100, 000+1,200,000)/2 = P1, 150, 000

9. Selected information for 2004 for the Prince company is as follows:

Cost of goods sold P5, 400,000 Average receivables P960, 000

Average inventory 1, 800,000 Net income 720,000
Net sales 7, 200,000

Assuming a business year consisting of 360 days, what was the average number of days
in operating cycle for 2004?
a. 72 days b. 84 days c. 144 days d. 168 days

D. Days in inventory = (360 days/ 3* times) = 120 days

Age in receivables = (360 days/ 7.5** times) = 48 days
Days in operating cycle = 168 days

* Inventory turnover = (5, 400,000 / 1, 800,000) = 3 times

** Receivable turnover = (7,200,000/ 960,000) = 7.5 times
10. Royal companys net accounts receivable were P 500,000 at December 31, 2003, and P 600,000
at December 31, 2004. Net cash sales for 2004 were P200,000
The accounts receivable turnover for 2004 was 5.0
What was Royals net sale for 2004?

a. P2, 950,000 b. P3, 000,000 c. P3, 200,000 d. P5, 500, 000

A. Total net sales (550, 000* x 5) + 200, 000 = P2, 950, 000

* Average receivables = (500,000 + 600, 000)/2 = 550, 000

11. During 2004, Red incorporated purchased P2, 000,000 of inventory. The cost of goods sold for
2004 was P 2, 200, 000 and the ending inventory at December 31, 2004 was P 400, 000.
What was the inventory turnover for 2004?
a. 4.0 times b. 4.4 times c. 5.5 times d. 11.0 times

B. Inventory turnover = 2, 200, 000 = 4.4 times

(600, 000* + 400, 000)/ 2

*Inventory, beginning = (2, 200, 000 + 400, 000 2, 000, 000) = 600, 000

12. Selected Information- from the Code Companys accounting records is as follows
Cost of goods sold- 2004 P 1, 200, 000
Inventories- December 31, 2003 350, 000
Inventories- December 31, 2004 310, 000

Assuming a business consisting of 300 days what was the number of days sales in
average inventories for 2004?

a. 36.5 days b. 77.5 days c. 82.5 days d. 87.5 days

C. Days sales in average inventory = (300 days / 3.6 * times) = 82.5 days

*Inventory turnover = (1, 200, 000) / [(350, 000 + 310, 000)/2] = 3.6 times
 ITEMS 13 AND 14 ARE BASED ON THE FOLLOWING DATA:

Breton Corporations books showed the following information of 2004:

Net Credit sales P2, 000, 000

Net cash sales 500,000
Merchandise Purchases 1, 000, 000
Inventory, beginning 600, 000
Inventory, ending 200, 000
Accounts receivable, beg 300,000
Accounts receivable, end 700, 000
Net income 100, 000

13. Bretons accounts receivable turnover is

a. 2.9 times b. 3.8 times c. 4.0 times d. 5.0 times

C. Receivable turnover = P 2, 000, 000 = 4.0 times

(300, 000+ 200, 000)/2

14. Bretons percent of net income on sales is

a. 4% b. 9% c. 44% d. 56%

C. Percent of net income on sales = ( 100, 000 / 12, 500, 000) = 4.0 %

15. Selected information for Irving Company is as follows:

December 31
2003 2004
Preferred stock Non-convertible, 8%, par 100 P 125, 000 P 125, 000
Common stock 300, 000 400, 000
Retained earnings 75, 000 185, 000
Dividends paid-on Preferred stock for the year ended 10, 000 10, 000
Net income 60, 000 120, 000

Irvings return on Common (stockholders) equity for 2004 is

a. 17% b.19% c. 23% d. 25%
 C. Return on Common equity = P120, 000 10, 000 = 23.0 %
(375, 000* + 585, 000**)/2

*(300, 000 + 75, 000) = 375, 000

** (400, 000 + 185, 000) = 585, 000

ITEMS 16 AND 17 ARE BASED ON THE FOLLOWING INFORMATION:

Tudor corporations condensed financial statements provided the following data:

Balance sheet
December 31, 2004 and 2003

2004 2003
Cash Php60,000.00 Php50,000.00
Accounts Receivables, net 220,000.00 200,000.00
Inventories 260,000.00 230,000.00
Property and equipment 730,000.00 650,000.00
Accumulated depreciation (330,000.00) (260,000.00)
Total assets 940, 000.00 870,000.00

Statement of Income
For the year ended December 31, 2004

Net Sales Php1,200,000.00

Cost of goods sold 780,000.00
Gross profit 420,000.00
Operating expenses 240,000.00
Net income 180,000.00
16. Assuming that all sales are credit sales, what is Tudors accounts receivable turnover ratio for
2004?
a. 3.18 times b. 5.45 times c. 5.71 times d. 6.00 times

C. Receivable turnover = 1,200, 000 = 5.71 times

(220, 000 + 200, 000)/2

17. What is Tudors rate of return on average assets for 2004?

a. 14.17% b. 19.15% c. 19.89% d. 29.75%

C. Return on Average assets = 180, 000 = 19.89%

(940, 000 + 870, 000)/ 2

18. Information concerning the Gaul companys common stock is as follows:

Per share
Book value at December 31, 2004 P 12.00
Quoted market value on Stock Exchange on December 31, 2004 9.00
Earnings for 2004 3.00
Par value 2.00
Dividend for 2004 1.00

What was the price-earnings ratio on common stock for 2004?

a. 2.00 to1 b. 2.67 to 1 c.3.00 to 1 d. 4.00 to 1

C. Price-earnings Ratio = ( 9. 00 / 3. 00) = 3.0 to 1

19. At December 31, 2003, Richmond Company had 100,000 shares of P 10 par value common stock
issued and outstanding. There was no change in the number of shares outstanding during 2004.
Total stockholders equity at December 31, 2004 was P 2, 800, 000. The net income for the year
ended December 31, 2004 was P 800, 000. During 2004, Richmond paid P3.00 per share in
dividends on its common stock on the National Stock exchange was P24 on December 31, 2004.

What was the price-earnings ratio on common stock for 2004?

a. 3.0 to 1 b. 3.5 to 1 c. 4.8 to 1 d. 8.0 to 1

A. Price- earnings ratio ( 24.00 / 8.00*) = 3.0 to 1

*Earnings Per share = (800, 000 / 10,000 shares) = 8.00

20. Ventura Corporation was organized on January 1, 2004, with the following capital structure:

10% Cumulative preferred stock, par and liquidation

value P100, issued and outstanding 1,000 shares P100, 000
Common stock, par value P5; authorized 20,000 shares,
Issued and outstanding, 10,000 shares 50, 000

Venturas net income for the year ended December 31, 2004 was P450, 000, but no dividends
were declared.
How much was Venturas book value per common stock at December 31, 2004?

a. P 44 b. P45 c. P49 d. P50

C. Book value per share = (490, 000 * / 10, 000) = 49.00

*Total common Equity = (10, 000 shares x 5) + (450, 000 10, 000 **) = 490, 000
** Preferred Dividends = (100, 000 x 10%) = 10, 000

21. The following common-size income statements are available for Spunky Corporation:

2004 2003
Sales 100% 100%
Cost of sales 55% 70%
Gross profit 45% 30%
Operating expenses 20% 18%
Net income 25% 12%

The trend percentage for sales 130% 100%

What should be the trend percentage for gross profit for 2004?
a. 58.5 % b. 130% c. 150% d. 195%

D. Trend percentage for gross profit = ( 58.5 %*) / (130% - 100%) = 195.0%
Sales trend 2004 130%
Cost of sales (55% x 130%) 71.5 %
Gross profit* 58.5%
 ITEMS 22 AND 23 ARE BASED ON THE FOLLOWING DATA:

The selected data below pertain to Beck Co.s Beam division for 2004:
Sales P 1, 000, 000 Average invested capital P 200, 000
Variable costs 800, 000 Imputed interest rate 15%
Traceable fixed costs 100, 000

22. How much is the residual income?

a. P100, 000 b. P 270, 000 c. P 300, 000 d. P 330, 000

B. Sales 1, 000, 000

Variable costs: 600, 000
Controllable Margin 400, 000
Traceable fixed cost 100, 000
Operating income 300, 000
Imputed interest (200, 000 x 15%) 30, 000
Residual Income 270, 000

23. How much is the return on investment?

a. 75% b. 135% c. 150% d. 200%

C. Return on Investment = ( 300, 000 / 200, 000) = 150%

ITEMS 24 AND 25 ARE BASED ON THE FOLLOWING INFORMATION:

The following selected data pertain to Maple Division of Beyer Corporation for 2004
Sales P300, 000 Capital turnover 3.0
Average Invested Capital 100, 000 Imputed interest 12%
Operating Income 20, 000

24. The return on investment was

a. 6.67% b. 8.00 % c. 20.00% d. 33.33%

C. Return on investment = ( 20, 000 / 100, 000) = 20%

25. The residual income was
a. P2, 400 b. P5, 600 c. P6, 667 d. P8, 000

D. Residual Income 20, 000 ( 100, 000 x 12%) = 8, 000

ITEMS 26 AND 29 ARE BASED ON THE FOLLOWING INFORMATION:

The management of Sta. Veronica Consumer products Company is preparing its plans for the
year 2004. The average assets to be employed for the year are estimated at P 2, 600, 000 with
20% of this amount borrowed at no interest cost. Materials and labor cost for the year is
budgeted at P4, 000, 000, while operating costs is estimated at P 1, 500, 00. All sales are to be
billed at 162.5 % of materials and labor cost. Income tax rate is at an average of 35% of income
before income tax.

26. The estimated rate of return on sales for 2004 is

a. 10.0% b. 12.5% c. 14.29% d.27.66%

A. Estimated rate of return on sales = ( 650, 000* / 6, 500, 000**) = 10%

Mark up on materials and labor cost: (4, 000,000 x 62.5%) 2, 500,000

Operating expenses 1, 500,000
Taxable income 1, 000,000
Income tax 35% 350,000
Income after tax 650,000*

Estimated Sales = (4, 000,000 + 2, 500,000) = 6, 500,000**

27. The estimated rate of return on average total assets for 2004 is
a. 20.0% b.25.0% c. 31.25% d.40.50%

B. est. rate of return on Average total assets = ( 650, 000 / 2,600, 000) = 25%

28. The expected asset turnover for 2004 is

a. 1.50 times b. 2.50 times c.3.36 times d.3.75%

B. expected assets turnover = ( 6,500,000 / 2,600,000) = 2.5 times

 29. The rate of return on stockholders equity for 2004 is
a. 20.0% b. 25.0% c. 31.25% d.40.50%

C. Rate of return on stockholders equity = (650, 000 / 2, 080, 000*) = 31.25%

*2, 600, 000 (2, 600, 000 x 20%) = 2, 080, 000

ITEMS 30 AND 31 ARE BASED ON THE FOLLOWING INFORMATION:

Pinewood electronics registered accelerated increases in its net income, earning P437, 500 in
2003 to P1, 260, 000 in 2004. Rate of return on current assets increased from 25% in 2003 to 30% in
2004.Current asset turnover on the other hand, went up to 2.67 turnovers in 2004 from 2.45 turnovers
in 2003.

30. The average investment in current assets for the company in 2004 was
a. P1, 607, 500 b. P1, 750, 000 c. P4, 200, 000 d. P5, 040, 000

C. Average investment in current asset = ( 1, 260, 000/ 30%) = 4, 200, 000

31. The cost of goods sold and operating expenses excluding depreciation in 2003 amounted to
a. P4, 287, 500 b.P5, 022, 500 c. P6, 022, 500 d.P12, 054, 000

A. cost of goods sold and operating expenses

excluding depreciation = (1, 750, 000* x 2.45) = P4, 287, 500

2003 average investment in current assets = (437, 500/ 25%) 1, 750, 000*

ITEMS 32 AND 34 ARE BASED ON THE FOLLOWING INFORMATION:

The December 31, 2004, balance sheet of Ratio, Inc. is presented below. These are the only
accounts in Ratios balance sheet. Amounts indicated by a question mark (?) can be calculated
from the additional data given.
 Liabilities& Stockholders
Asset Equity
Cash Php25,000.00 Accounts payable, trade ?
Accounts Receivable, net ? Income tax payable 25000.00
Inventories ? Long term debt ?
Property, plant and
equipment 294000.00 Common Stock 300000.00
Retained earnings ?
Total assets Php432,000.00 Total Equity ?

Additional data:
Current ratio (year end) 1.5 to 1
Total liabilities divided by total stockholders equity .8
Inventory turnover based on sales and ending inventory 15 times
Inventory turnover based on cost of goods sold and end.inv 10.5 times
Gross profit for 2004 P 315, 000

32. What was Ratios December 31, 2004 balance in accounts payable?
a. P 67, 000 b. 92, 000 c. 182, 000 d. 207, 000

A. Total current assets (432,000 294,000) = 138,000

Current liabilities (138,000 / 1.5) = 92, 000
Less: Income tax payable 25, 000
Trade accounts payable 67, 000

33. What was Ratios December 31, 2004 balance in retained earnings?
a. 60, 000 Def. b. 60, 000 c. 132, 000 d. 120, 000

A. stockholders equity* 240, 000

Less: common stock 300, 000
Deficit 60, 000

*stockholders equity = 432, 000 = .8se + 1se = 240, 000

34. What was Ratios December 31, 2004 balance in inventory account?
a. 21, 000 b. 30, 000 c. 70, 000 d. 135, 000
 C. Inventory turnover : based on sales 15 times
Based on cost of sales 10.5 times
Based on gross margin 4.5 times

Ending inventory = (315, 000 / 45*) = 70, 000

35. The Bright Company has 20,000 shares authorized and 18, 000 shares issued and outstanding at
December 31, 2003 and 2004. It has no preferred stocks. In 2003, its net earnings amounted to
P53, 400 and 2004, P 55, 800.

What were the earnings per share for 2004?

a. 3.10 b. 2.79 c.2.97 d.2.67

A. Earnings per share = (55, 800 + 18, 000) = 3.10

ITEMS 36 AND 40 ARE BASED ON THE FOLLOWING INFORMATION:

The building of Champak Sales Corporation was gutted by fire thereby destroying its inventories
and its financial and accounting records. In recent prior years, however, Champak has maintained the
following relationships among the data on its financial statements:

Gross margin on net sales 40%

Net income on Net sales 10%
Accounts receivable turnover (sales/end. accounts receivable) 8 per year
Inventory turnover (cost of sales/ end. inventory) 6 per year
Acid-test ratio 2 to 1
Current ratio 3 to 1
Quick asset composition:
8% cash; 32% marketable securities; 60% Accounts receivable
Asset turnover (sales / year-end total assets) 2 per year
Ratio of total assets to Intangible assets 20 to 1
Ratio of accumulated depreciation to cost of fixed assets 1 to 2

Champak had a net income of P120, 000 for the year

Accounts were reconstructed based on the above given information.
36. What is the balance of cash account?
a. 25, 000 b. 20, 000 c. 35, 000 d. 30, 000

B. Sales (120, 000 / 10%) 1,200,000*

Accounts receivable (1,200,000*/8) 150,000**
Quick assets (150,000**/ 60%) 250,000***
Cash (250, 000 ***x 8%) = 20,000

37. What is the accounts receivable (net) account balance?

a. 100, 000 b. 125, 000 c. 150, 000 d. 200, 000

C. Accounts receivable = ( 1,200,000 / 8) = 150, 000

38. What is the balance of Champaks inventory account at December 31, 2004?
a. 150, 000 b. 125, 000 c. 100, 000 d. 120, 000

D. Inventory, December 31 = (720, 000* / 6) = 120, 000

*Cost of sales = (1,200,000 x 60%) = 720, 000

39. What is the total cost of property and equipment?

a. 195, 000 b. 292, 500 c. 175, 000 d. 250, 000

B. Cost of property and equipment = (195, 000 * x 3/2) = 292, 500

Total Assets (1,200,000/2) = 600,000

Intangible assets (600,000/20) = 30,000
Current assets (250,000 x 3 /2) 375,000

Property and equipment (net) (600, 000 300,000 - 375,000) = 195, 000*

40. What is the balance of the intangible assets account?

a. 50, 000 b. 25, 000 c. 20, 000 d. 30, 000

D. Intangible assets (600, 000 / 20) = 30,000